A study finds that workers without employer-sponsored retiree health benefits often retire when they become Medicare-eligible, even if they haven't reached full retirement age for Social Security.
What matters most to workers nearing retirement: income or health-care coverage? A recent study by researchers at the Center for Retirement Research at Boston College suggests it could be the latter. They examined data about when people filed for Social Security benefits and whether their employer offered retiree health benefits. The result: Even if they had yet to reach full retirement age for Social Security, workers without retiree health benefits were more likely to retire at 65, the age of Medicare eligibility for most people, than their counterparts who did get retiree health benefits. Matthew Rutledge, a research economist who co-authored the study, responded to questions from Morningstar by email.
Your study found a correlation between when people choose to retire and whether they have retiree health benefits through work. Can you explain?
The biggest spike in retirement has always been at age 62 because that's when all the people who would have loved to retire earlier can finally retire [because they're eligible for Social Security]. But once we get past that point, the other big spike in retirement was always at age 65. The difficulty had always been that 65 was both the Social Security full retirement age, or FRA, and the age at which Medicare is first available. But the recent FRA increases for Social Security [the new ages being 66 for those born between 1943 and 1954 and 67 for those born in 1960 or after] have allowed us to look at whether 65 remains a milestone retirement age because of Medicare access. In particular, we wanted to see whether those groups who we'd think would be most sensitive to health insurance access--people who are working for their health insurance and know that they won't have retiree health insurance when they quit--are also the group most likely to continue to retire at 65; that would be an indicator that they're retiring because of Medicare.
There's nothing in the Social Security structure that says people have to wait until their FRA; if they claim a month or two early, their benefit is reduced just a little, so it's not like there's some big jump in what you can get at your FRA. But, of course, there is something special about 65, both then and now: Medicare. And that's what our paper is trying to show.
Would you say your findings suggest that those with retiree health benefits feel more freedom to retire on their own terms whereas those without those benefits often are just hanging on until Medicare kicks in?
I think at least the first part of that is true. There are lots of reasons to continue working past the point where you could get some income from Social Security, 401(k)s, IRAs, and/or defined-benefit pensions, and one reason that we think is pretty powerful is employer-sponsored health insurance. Many other economists have found that the way we tend to provide insurance in this country--through career-type jobs--restricts workers from switching jobs to find a better match or leaving to start their own business. So there's evidence that lots of people are working where they're working because of the health insurance benefits. When you turn 65 and Medicare becomes available, you no longer have to work just for the insurance, so unless you love your job or need to keep earning your salary or have some other incentive (like pension accrual), you gain the freedom to leave when you want.
Do you think the Affordable Care Act will have any effect on the patterns you've identified?
It depends on its implementation and perceived success. The pre-Affordable Care Act market for nongroup health insurance plans is daunting at best, and dysfunctional at worst, so very few people--especially in their 60s, when health can start to decline--have treated the nongroup market as a legitimate option. The health insurance exchanges are meant to make the nongroup market function more like the market for group coverage that people are used to getting through their employers, with much more affordable premiums and a more informed, streamlined enrollment process. If nongroup coverage is a more legitimate option and, importantly, comparable to the Medicare coverage they'll get at 65 (or whenever it kicks in, if further reform moves it out), then employees who are working just for the insurance won't have to wait for Medicare.
Your study also found that people tend to slightly underestimate the amount of Social Security benefits they will receive. How does this fit in with your overall point about the importance of health care in retirement decision-making?
Figuring out your monthly benefit can be a challenge, though the Social Security earnings statement that people get each year [paper statements are mailed to those age 60 and older who aren't yet receiving benefits] helps, which probably explains the relatively low difference between their expected benefit and what we calculate they should expect to get. The reason we looked at actual versus expected benefits is that we were worried that some people continue to retire at 65 because they're just unaware that their FRA increased. Basically we're using the difference between their actual and expected benefits as a proxy for whether people are well-informed about the structure of the Social Security program. We found that even though the average mistake is low, some people are hugely misinformed. But even those misinformed people weren't any more or less likely to retire at 65 after the FRA change. We think that strengthens the health insurance findings, as it suggests what really matters about age 65 is whether retirees are counting on Medicare to have access to health insurance, rather than thinking they could still get their full benefit at 65.
