Increasing Health Care Costs Preventing Retirement

The study report concluded the increase in health care premiums for individuals who stop working before age 65 and the expected out-of-pocket health care costs after age 65 substantially delay retirement. The increase in premiums after retirement also includes loss of spousal coverage for workers who insure their spouses with their employer-sponsored health plan.

The CRR report noted retirement patterns differ by health insurance coverage. Workers whose employers offer retiree health benefits are more likely to retire than workers with employer-sponsored health benefits that do not continue into retirement. The median retirement age is about 62 for workers with retiree health insurance and 63 for workers with no retiree health benefits. Those with no health benefits from their employers are also more likely to remain in the labor force past age 65.

Using data from the Health and Retirement Study in 1994 of respondents age 52 to 63 who were employed full time, CRR researchers found the own premium cost of retirement before age 65 significantly reduces retirement probabilities for both older men and older women. When calculated using a 3% discount rate, a $1,000-increase in the own premium cost of retirement lowers the likelihood that both men and women retire by about 0.1 percentage points. However, the data indicated the spousal premium cost of retirement before age 65 does not significantly affect retirement decisions for either men or women.

The data also showed the present discounted value of expected post-65 health care costs reduces retirement probabilities.

The researchers’ simulations showed that men with relatively low premium costs of retirement before age 65 – set equal to the median value among those with employer-sponsored retiree health insurance – retire about nine months earlier than men with relatively high premium costs. For women, the difference was 11 months.

Men with expected post-65 health care costs equal to the 90th percentile of the overall distribution retire 11 months later than those with health care costs equal to the 10th percentile of the overall distribution (64 years, 1 month versus 63 years). For women, the difference is 12 months.

The report said when the researchers used an annual discount rate of 3%, the mean value of own premium cost of retirement is $11,983 (in 2004 dollars) for men and $13,512 for women. The 1994 present value of expected future out-of-pocket health care costs after age 65 when computed using a 3% discount rate is about $82,000 (mean) for men and about $66,000 for women.

The report, “Do Out-of-Pocket Health Care Costs Delay Retirement?”, is located here.