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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 retiree health benefits need not wait until age 65 to retire with group health coverage. We investigate the impact of retiree health insurance on early retirement using employee-level data from 54 diverse firms that are clients of Towers Watson, a leading benefits consulting firm. We find that retiree health coverage has its strongest effects at ages 62 through 64. Coverage that includes an employer contribution is associated with a 6.3 percentage point (36.2%) increase in the probability of turnover at age 62, a 7.7 percentage point (48.8%) increase in the probability of turnover at age 63, and a 5.5 percentage point (38.0%) increase in the probability of turnover at age 64. Conditional on working at age 57, such coverage reduces the expected retirement age by almost three months and reduces the total number of person-years worked between ages 58 and 64 by 5.6%.

In the United States, there is currently a strong link between health insurance and employment. Most individuals can only purchase health insurance at favorable group rates through their employer, and there are significant tax advantages to employer-based coverage. Employment-based health insurance can make it more difficult for individuals to retire before they become eligible for health insurance through Medicare at age 65. While some employers extend health insurance coverage to their pre-65 retirees, most do not. According to the Kaiser Family Foundation (2012), only 25% of large firms (with 200 or more employees) and 4% of small firms that offer employee health coverage also extend benefits to retirees. A worker whose employer does not offer retiree health coverage has limited options for obtaining health insurance if he or she retires before becoming eligible for Medicare. Buying an individual health insurance policy can be difficult, particularly for those with preexisting conditions. The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 allows workers who leave their jobs to continue to participate in their former employer's health plan at group rates for up to 18 months. This law makes it possible for workers to retire at age 63½ without losing group coverage, although they would forego any employer contribution toward their premiums. In this paper, through the lens of a new data source, we revisit the impact of the availability of group health insurance on the decision to retire. Our dataset consists of employee records from a large and diverse group of firms, drawn from among the clients of Towers Watson, a leading benefits consulting firm. These employee records are matched to detailed information about the firms' benefit provisions. Some of Towers Watson's clients offer health insurance to their retirees, while others do not. Moreover, the retiree health benefits that are offered vary in their generosity and eligibility criteria. Another advantage of our dataset is that we can control for a number of firm-level characteristics that influence retirement, including specific features of defined benefit and defined contribution pension plans. If access to health insurance does in fact influence retirement decisions, then we would expect to find a relationship between retiree health coverage and retirement for persons age 64 or younger. This question is particularly important in light of the recently passed Patient Protection and Affordable Care Act (PPACA) of 2010, which will considerably weaken the link between employment and health insurance by making group coverage available to all individuals regardless of employment. Many individuals will also receive explicit subsidies to purchase group coverage, and older individuals will also likely receive substantial implicit subsidies through a legal limit on their premiums relative to those paid by younger individuals. One possible consequence of this reform is that it may encourage earlier retirements, as all older workers will be able to maintain group coverage – often with generous subsidies – even if they retire before Medicare eligibility. Studying the link between employer-provided health insurance and retirement can help us to understand the potential impact of PPACA on the labor market participation of older pre-Medicare workers. To preview our results: We find that after controlling for individual and firm characteristics and pension plan features, being eligible for subsidized retiree health coverage (i.e., coverage in which the employer contributes towards the premium) raises the probability of turnover (leaving the firm) by 6.3 percentage points at age 62, representing a 36.2% increase relative to the turnover rate for individuals with no coverage. It raises the probability of turnover by 7.7 percentage points (48.8%) at age 63 and by 5.5 percentage points (38.0%) at age 64. We find no such effects for individuals who work for firms that offer retiree health insurance but do not meet the eligibility criteria for coverage. The effects of retiree health coverage are fairly consistent for men and women, and for high-salary and low-salary workers. We find little evidence that “access only” (i.e., coverage in which the retiree gets a group rate but the employer does not contribute towards the premium) influences retirement decisions in this age range. Subsidized retiree health coverage reduces the total years of employment between ages 58 and 64 by 5.6%. These results are consistent with the hypothesis that Medicare eligibility influences workers' retirement decisions, specifically among individuals who are younger than age 65 and do not have access to subsidized retiree health coverage. The remainder of the paper is organized as follows. Section 2 summarizes the previous literature on the relationship between health insurance and retirement, and describes the contribution of this paper. Section 3 describes our dataset. Section 4 presents our methodology, and Section 5 discusses our results. Section 6 concludes.

For most people under the age of 65, group health insurance coverage is only available through employment. In this paper, we have presented evidence that the link between health insurance and employment may cause individuals to delay retirement until they are eligible for Medicare. In particular, we have shown that after controlling for individual characteristics and pension incentives, employees under the age of 65 have substantially higher turnover rates at firms that offer subsidized retiree health coverage compared to their counterparts at firms that do not. Moreover, higher subsidy rates are associated with greater turnover than lower ones. Subsidized coverage has its largest effect at ages 62–64, raising the turnover rate at age 62 by 6.3 percentage points (36.2%), by 7.7 percentage points (48.8%) at age 63, and by 5.5 percentage points (38.0%) at age 64. Our model predicts that, conditional on working at age 57, only 28.2% of individuals with subsidized coverage remain at their firm at age 65, compared to 36.8% of individuals with no retiree health coverage. The Patient Protection and Affordable Care Act (PPACA), which became law in 2010, will soon weaken the link between health insurance and employment by making it possible for all individuals to buy group coverage regardless of employment status. It could also provide a considerable number of individuals with subsidies towards their health insurance premiums, depending on their household income and employer-provided coverage. For those who qualify for a subsidy, the new law provides a tax credit such that the premium a person pays does not exceed 9.5% of household income. For those with income less than 400% of the Federal Poverty Level, the subsidies are even greater. Older Americans who do not qualify for explicit subsidies can still expect to receive substantial implicit subsidies. The new law prohibits insurers from charging older individuals – even those with pre-existing conditions – premiums that are more than three times the rates paid by younger individuals. As such, many older workers across all income groups will have new opportunities for affordable, non-employment based health care coverage that is comparable to today's employer-provided subsidized pre-65 retiree medical coverage today. Based on our results, we would expect these new alternatives to increase retirement rates among older workers who are below Medicare eligibility age. The primary effect will be on those with current employer-provided coverage who would not be able to obtain retiree coverage if they left their jobs; health care reform effectively provides these individuals with some level of subsidized retiree coverage. We are hesitant to use our results to make a projection for the population as a whole given the complex structure of the subsidies and the fact that our sample consists of individuals whose employers have offered defined benefit (DB) pension plans in the past. However, this would be a valuable undertaking for future research. Despite these limitations, our results still suggest that the effects of affordable retiree medical coverage, of the sort that will be available to all Americans in 2014 under PPACA, could have a substantial impact on future retirement patterns. The social welfare implications of this change in retirement incentives are not straightforward. Viewed by itself, the link between health insurance and employment (which results from the favorable tax treatment of employer-provided coverage) distorts retirement decisions, and breaking that link would increase efficiency. However, viewed in the context of other policies that affect retirement incentives, this may not be the case. For example, Social Security imposes high implicit tax rates on older workers and inefficiently encourages early retirement (see, e.g., Goda et al., 2009). For individuals below Medicare eligibility age, there is currently a countervailing effect: employment-based health insurance discourages early retirement and mitigates the distortion caused by Social Security. Breaking the link between employment and health insurance removes this countervailing effect, thereby amplifying the distortion caused by Social Security and potentially reducing efficiency. A valuable area for future research would be to examine the impact of PPACA in the context of other policies that affect the retirement incentives of older workers, including not only Social Security, but also other entitlement programs and private pensions.