The number of companies The Erosion of Retiree Health Benefits offering health benefits to early retirees is declining, and Retirement Behavior: Implications although reductions in the percentage of early retirees for the Disability Insurance Program covered by health insurance have been only slight to date. by Paul Fronstin* In general, workers who will be covered by health insur Summary year gap between eligibility for DI and ance are more likely than Medicare. In fact, persons with suffi The effects of retiree health insurance other workers to retire before cient means to retire early could use the the age of 65, when they be on the decision to retire have not been income from Disability Insurance to buy come eligible for Medicare. examined until recently. It is an area of COBRA coverage during the first 2 What effect that will have on increasing significance because of rising years of DI coverage. claims under the Disability health care costs for retirees, the uncer Determining the effect of the erosion Insurance program is not yet tain future of Medicare, and increased of retiree health benefits on DI must clear. life expectancy. In general, studies account properly for the role of other Acknowledgments: An earlier suggest that individual retirement deci factors that affect DI eligibility and version of this paper was sions are strongly responsive to the participation. The financial incentives of presented at the symposium on availability of retiree health insurance. Social Security, pension plans, retire Disability, Health, and Retire- Early retiree benefits and retirement ment Age: Challenges for Social ment savings programs, health status, the behavior are also important because they Security Policy, cosponsored by availability of health insurance, and may affect the Social Security Disability the Social Security Administra- other factors influencing retirement tion and the National Academy of Insurance (DI) program. It is not appar decisions must be taken fully into Social Insurance, Bethesda, Md., ent that if a person loses retiree health account in order to isolate the precise September 2000. The author benefits, or if fewer people are eligible effect of retiree health benefits. thanks Virginia Reno for her for retiree health benefits in general, comments. claims for DI will increase. The potential Introduction *The author is with the 2-year loss of health benefits may be a Employee Benefit Research deterrent to leaving the labor force and Retirementdefined here as complete Institute. claiming DI, although persons who are withdrawal from the labor forcecan unable to work would leave the labor best be defined as a process rather than force even without health benefits. as a single event (Quinn and Kozy In order to understand how the 1996). The process generally begins with decline in retiree health benefits may the termination of career employment affect enrollment in DI, analysts must at and frequently includes periods of least incorporate the role of coverage postcareer employment, part-time work, under the Consolidated Omnibus Budget partial retirement, and temporary retire Reconciliation Act of 1985 (COBRA). ment (Ruhm 1991). Workers often use That act provides many people with one or more transitional stages, or bridge access to health insurance during the 2 jobs, between their career job and 38 Social Security Bulletin Vol. 63 No. 4 2000 retirement. One common transitional stage is movement by Madrian (1994). Almost 75 percent of wage and from full-time to part-time work. For wage and salary salary workers between the ages of 18 and 64 have workers, the move usually entails switching jobs, but it is employment-based health insurance coverage (Fronstin sometimes accomplished by remaining in their current 1996). That insurance is portable into retirement only in jobs on a part-time basis. the sense that some workers have the option of con The process of retirement varies with individual tinuing their coverage under the Consolidated Omnibus preferences, predicted future earnings, pension accruals, Budget Reconciliation Act of 1985 (COBRA).2 With Social Security benefits, health, and preferences for out retiree health insurance, workers might not have leisure. It may be made by weighing the combined access to coverage until age 65, when they become benefits of the wages from continuing to work and the eligible for Medicare.3 potential increase in future income from accruing greater While some workers would have access to retiree pension benefits against the costs of forgoing the in health insurance in other waysthrough a spouse or in creased leisure of retirement and future pension accruals. the private marketmost would not.4 Purchasing To be realistic, the decision should account for risks, health insurance in the private market may not be including uncertain future income, inflation, and prema affordable, however. Employers that provide access to ture death. group health insurance are usually able to obtain lower Health insurance coverage may also be a factor in the premiums than individuals can because the insurance retirement decision. Employer-sponsored health insur companies spread risk across larger groups of people ance can represent a significant source of income secu and average administrative costs are lower. rity for early retirees because Medicarethe federal In addition, the need for health insurance increases health insurance for retired personsis not available to with age (Madrian 1994). Older individuals are more people under age 65 unless they are disabled. Although likely than younger people to be in fair or poor health, early retirees as a group are probably healthier than those they are more likely to have been diagnosed with a age 65 or older, the risk of medical need increases with serious health condition, and they spend a greater age. Early retirees without health insurance may be proportion of their family income on medical expenses. vulnerable to costly medical expenses. Individually As a result, lack of health insurance during retirement purchased health insurance can be expensive, may could be an impediment to leaving the labor force restrict coverage for certain services, and may be before age 65. unavailable for those with preexisting conditions who lack Hurd and McGarry (1993) examined the retirement prior creditable health insurance coverage. Group health intentions of current workers, as opposed to retired insurance through an employer is usually the most workers retrospective responses to various factors affordable source of health insurance coverage for early affecting their decision to retire. Specifically, they retirees. examined the effect that the availability of retiree This article examines the link between retiree health health insurance would have on the probability that a benefits and retirement behavior, recent trends in retiree full-time worker would continue full time beyond age health benefits, and implications for future Disability 62. Using data from the 1992 Health and Retirement Insurance programs claims. Study, Hurd and McGarry asked workers to rate on a scale of 0 to 100 what the chances were that they Health Benefits Influence on Early Retirement would be working full time at age 62 and at age 65. The study found that workers who have retiree health A workers decision to retire early is directly linked to insurance that is at least partially funded by their the availability of retiree health insurance, a recent employer are 18 percent to 24 percent less likely to be public opinion poll found (Employee Benefit Research working full time beyond age 62 than workers without Institute 1998).1 In 1998, 74 percent of workers reported insurance. that they would not retire before becoming eligible for In a study limited to men, Karoly and Rogowski Medicare unless their employer provided retiree health (1994) found that the probability of retiring early benefits, and 47 percent of workers expected to receive would increase 50 percent, or approximately 9 percent such benefits. The same survey showed that 45 percent age points, among workers who had access to health of workers planned to retire before age 65. Finally, 82 insurance. They also found evidence that the availabil percent of the respondents believed they would need ity of health insurance coverage in addition to em- additional health insurance coverage beyond what is ployer-provided insurance increased the likelihood of provided by the Medicare program. early retirement. (The source of that insurance was The reason that health insurance availability influ usually the wifes employer.) The study suffers from a ences the decision to retire is straightforward, as noted number of shortcomings that may have affected the Social Security Bulletin Vol. 63 No. 4 2000 39 results, however. First, it imputes the availability of retiree Their study found that the probability of retiring health insurance on the basis of firm size, industry, and increases 32 percent (2.2 percentage points) for each region. As a result, the effects of retiree health insurance additional year of continuation of coverage.7 How may be overestimated because firm size and industry can ever, the study may have overestimated the effects if be highly correlated with retirement decisions for reasons individuals are using continuation-of-coverage other than health insurance, such as pension plan provi benefits as a bridge to future employment rather than sions. as a bridge to Medicare eligibility. In fact, the study Second, the results may be overstated because the finds that approximately 16 percent of the retirement study does not take into account accumulated pension or effect is accounted for by job changes. Social Security wealth. Since it does not capture the Like Gustman and Steinmeier (1994), Lumsdaine, influence of defined benefit plans, which may contain Stock, and Wise (1994) used longitudinal data from a strong economic incentives to retire early, the apparent single firm in a model developed originally to esti effect of retiree health insurance may actually represent mate the impact of Social Security and pension plans the combined effect of retiree health benefits and pen on retirement behavior.