Retirement: Early Retirement Incentives

A major factor influencing the retirement decision of many workers is the ability to purchase health insurance and the cost of this coverage. Medicare provides almost universal coverage to persons age sixty-five and over; however, individuals considering early retirement must be concerned with how to pay for their health care from retirement until age sixty-five. Workers who are covered by employer-provided health insurance while employed must include the cost of buying individual health insurance coverage if they retire. Comprehensive health coverage for a retiree and spouse is very expensive. The prospect of paying for health insurance until age sixty-five reduces the probability that older workers will take early retirement.

Beginning in the 1960s, many large companies adopted retiree health plans that allowed workers to remain in their former employer’s health plan until age sixty-five, or, in many instances, for life. Employer-provided retiree health insurance should be considered an important ERI program. Limited evidence indicates that persons covered by retiree health plans are more likely to retire than other older workers (Currie and Madrian). These plans are often used in conjunction with pension plans to facilitate retirement (Clark et al.). The incidence of coverage by retiree health plans declined substantially during the 1990s in response to increases in medical costs, changes in accounting rules, and reductions in Medicare payments (U.S. Bureau of Labor Statistics, 1998).