Health Insurance and Retirement Decisions
Authors
Abstract
We develop a rich model to study the complex interrelationship between health insurance and retirement decisions. The decision to retire depends on a number of factors including availability of health insurance, health shocks, pensions, Social Security, and how consumption and health interact in the utility function. We incorporate these features in a computational model of optimal wealth and retirement decisions, solving the model household-by-household using data from the HRS. We use the model to study two important SSA priority areas: first, to what extent do people remain in the labor force until age 65 in order to maintain health insurance for themselves (and after age 65 to maintain health insurance for their spouses)? Second, do early retirees have poorer health than others and does the availability of Medicare interact with their decision to claim benefits?
Key Findings
- We develop a rich life-cycle model of optimal consumption and retirement decisions where the stock of health affects utility and longevity and is influenced by one’s health insurance status.
- Some households respond to shortfalls in retirement wealth by working longer than originally anticipated or investing less in health.
- Households facing a delay in the availability of post-retirement health insurance find it attractive work longer and to invest more in their health.
- While very adverse health shocks can lead to retirement well before age 62, we find that around 85% of early retirees at age 62 are in good health.
- Also, the availability of post-retirement health insurance induces households to retire about 3 months earlier than their counterparts without such insurance.
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Paper ID
WP 2013-292Publication Type
Working Paper