The tradeoff between health and wealth in retirement decisions

Abstract

In the United States, because access to health insurance is tied to employment, the availability of retiree health insurance interacts with post-retirement income to shape the retirement decision. This paper uses administrative data from the California Department of Education to estimate the rate at which individuals' trade off post-retirement health insurance benefits for a longer retirement and for retirement income benefits. The sensitivity of retirement to the return to working in terms of post-retirement health insurance is estimated. This estimate is then compared to the sensitivity of retirement to pension generosity in order to determine the implied rate at which individuals substitute between health insurance and pension benefits. The two estimation methods used leverage plausibly exogenous benefit variation driven by the sharp features of the retiree benefit programs. The results imply that individuals will delay retirement to become eligible for retiree health benefits, but that the effect is small relative to the effect of pension benefits on retirement timing.