Do Out-of-Pocket Health Care Costs Delay Retirement?

Richard W. JohnsonRudolph G. Penner Desmond Toohey



Rising health care costs threaten many older Americans’ financial security, perhaps leading people to delay retirement. For workers receiving health benefits from their employers, continued work reduces the risk of high out-of-pocket health care costs. Working longer also increases retirement incomes, making health care costs more affordable. This paper examines the impact of expected future out-of-pocket medical spending on retirement decisions. The results show that the premium costs associated with retirement before age 65 and expected out-of-pocket health care costs after 65 substantially delay retirement. A $1,000-increase in the own premium cost of retirement before age 65 lowers the likelihood that both men and women retire by about 0.1 percentage points, implying an elasticity of about –0.058 for both groups. The estimated elasticity of retirement with respect to the present discounted value of expected post-65 health care costs range from –0.16 to –0.20 for men, and from –0.14 to –0.16 for women. Men with expected post-65 health care costs equal to the 90th percentile of the overall distribution retire 11 months later than those with health care costs equal to the 10th percentile of the overall distribution. For women, the difference is 12 months.