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

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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. Men with relatively low premium costs of retirement before age 65—set equal to the median value among those with retiree health insurance offers from their current employers—retire about nine months earlier than men with relatively high premium costs—set equal to the median value among those with employer health benefits that do not continue into retirement. For women the difference is about 11 months. 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.