Retiree Health Insurance and Early Retirement in the Public Sector

...state and local government employees aged 60 to 64 are 5.1 percentage points more likely to stop working if they have retiree health benefits than if they do not.

Public sector employment in the United States is often characterized as having lower salary levels than private sector employment, in return for which employees enjoy higher job security, greater access to defined benefit pensions, and retiree health insurance that is available at a relatively young retirement age. In The Role of Retiree Health Insurance in the Early Retirement of Public Sector Employees (NBER Working Paper No. 19563), John Shoven and Sita Slavov investigate whether access to retiree health benefits raises the likelihood that public employees retire before age 65, the age of eligibility for Medicare insurance coverage.

They find that state and local government employees aged 60 to 64 are 5.1 percentage points more likely to stop working if they have retiree health benefits than if they do not. For those without such benefits, the probability is 18.4 percent; for those with coverage, it is 23.5 percent. Private sector employees aged 60 to 64 with retiree health benefits are 3.3 percentage points more likely to retire early than their counterparts who have no such benefits. The availability of retiree health benefits does not appear to affect the probability of retirement for federal civilian or military employees at any of the ages studied.

The authors study data from the 1992, 1998, and 2004 waves of the Health and Retirement Study (HRS). Their sample is restricted to people who had five or more years of service in their current job. The HRS provides an unusually rich set of control variables that might affect retirement decisions.

Public sector employees were more likely to have higher pension wealth and lower total non-pension assets than their private-sector counterparts. They also had higher average earnings, in contrast to some claims, and were more likely to be female, have a college degree, and be non-white. They were more likely to have employer-provided health insurance, retiree health insurance, and a defined benefit pension than private sector employees.

The authors note that the Affordable Care Act, which was enacted in 2009, may alter the relative attractiveness of jobs in the private sector and in state and local government. The new health benefit exchanges offer guaranteed-issue subsidized health insurance policies for Americans of any age, weakening the connection between employment and health insurance. This may substantially reduce the value of one of the historically important benefits of state and local government employment.

--Linda Gorman