The Tradeoff Between Health and Wealth in Retirement Decisions

Kristine M. Brown

WP#2014-7

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.