How Much Do Older Workers Value Retiree Health Insurance? – Center for Retirement Research

Abstract 

Retiree health insurance (RHI) is increasingly rare, and even government employers – long a bastion for RHI – are cutting back. Little is known about the implications of this retrenchment, and particularly about the value that employees place on RHI. This project estimates older workers’ willingness to pay for RHI using a natural experiment in Rhode Island state government that presented workers eligible for retirement with a choice: they could retire by September 30, 2008 and keep the existing generous RHI benefit, or they could retire later and continue accruing pension benefits at the cost of having less generous RHI in the future. The sharp increase in retirements immediately prior to the September 30 deadline, relative to prior year norms, allows us to estimate the relative elasticity of retirement with respect to RHI versus pension benefits. The results show that older state employees are highly sensitive to RHI. Increasing the RHI cut by $1,000 (in present value terms) caused a 0.6 percentage-point increase in the likelihood of retiring by September 30. In contrast, increasing counterfactual pension wealth by $1,000 reduced early retirements by 0.3 percentage points, suggesting that older state employees value a marginal dollar of RHI at least twice as much as a marginal dollar of pension benefits. In total, the reform tripled the retirement rate compared to the year prior.