Providing Retiree Health Insurance Encourages Early Retirement

The strong link between health insurance and employment in the United States may cause workers to delay retirement until they become eligible for Medicare at age 65. However, some employers extend health insurance benefits to their retirees, and individuals who are eligible for such benefits need not wait until age 65 to retire with group health coverage.

Employees under the age of 65 have substantially higher turnover rates at firms that offer subsidized retiree health coverage than at firms that do not.

In Does Retiree Health Insurance Encourage Early Retirement (NBER Working Paper No. 17703), authors Steven Nyce, Sylvester Schieber, John Shoven, Sita Slavov, and David Wise use employee-level data from 64 diverse firms that are clients of TowersWatson, a leading benefits consulting firm, to investigate the impact of retiree health insurance on early retirement. After controlling for individual characteristics and pension incentives, they find that employees under the age of 65 have substantially higher turnover rates at firms that offer subsidized retiree health coverage than at firms that do not. Subsidized retiree health coverage has its strongest effects at ages 62 and 63, resulting in a 21 percent increase in the probability of turnover at age 62 and a 32 percent increase in the probability of turnover at age 63.

Moreover, higher subsidy rates are associated with greater turnover than lower subsidy rates. For example, an employer contribution of 50 percent or more of the cost of health insurance raises turnover by nearly 34 percent at age 62, and by nearly 44 percent at age 63. The authors estimate that a subsidy of 50 percent or more lowers the expected retirement age by 9 months overall, and by more than a year for workers with 15 or more years of experience.

--Claire Brunel