RETIREMENT RESEARCH May 2013, Number 13-7 HOW IMPORTANT IS MEDICARE ELIGIBILITY IN THE TIMING OF RETIREMENT? By Norma B. Coe, Mashfiqur R. Khan, and Matthew S. Rutledge* Introduction Medicare Eligibility and Eligibility for Medicare at age 65 is widely viewed as Retirement an important factor in retirement decisions. How- ever, it has been difficult to quantify the influence of Researchers are virtually unanimous that health in- Medicare because eligibility for Medicare came at the surance availability generally, and Medicare eligibility same age as Social Security’s Full Retirement Age at age 65 specifically, influences workers’ retirement (FRA). The recent rise in the FRA, along with other decisions.2 However, not all workers will be equally changes, has decoupled the age-related incentives in sensitive to Medicare eligibility. It is not expected to the two programs, making it easier to estimate the affect the retirement decisions of the 44 percent of effect of Medicare eligibility on the timing of retire- workers age 64 who have employer-provided retiree ment. This brief, based on a recent study, provides health insurance (RHI), as they have continuous such estimates of the importance of Medicare on health coverage regardless of employment.3 But retirement decisions.1 Medicare eligibility can be expected to affect the The discussion proceeds as follows. The first remaining 56 percent of workers age 64 without RHI section discusses the relationship between Medicare (see Figure 1 on the next page). It should be espe- eligibility and the timing of retirement. The second cially important to the 25 percent of workers who section describes the metric used for assessing the have employer-provided health insurance (EHI) but timing of retirement and the effect of Medicare eli- not RHI: they would lose their health coverage if they gibility. The third section reports the findings. The retired prior to age 65.4 It could also be important fourth section concludes that Medicare eligibility is a for the 31 percent of workers who lack EHI as well as significant factor in the retirement decision, but that RHI: Medicare coverage could free up resources oth- changes in the availability of health insurance for erwise spent on out-of-pocket medical costs, making retirees could alter its importance going forward. retirement more affordable at age 65.5 * Norma B. Coe is an assistant professor of health services at the University of Washington and an affiliated researcher of the Center for Retirement Research at Boston College (CRR). Mashfiqur R. Khan is a graduate research assistant at the CRR. Matthew S. Rutledge is a research economist at the CRR. 2 Center for Retirement Research Figure 1. Workers Age 64 by Health Insurance Figure 2. Social Security Full Retirement Age, by Coverage, 1996-2010 Year Worker Turns Age 65 RHI = Retiree Health Insurance EHI = Employer Health Insurance 66 EHI, no RHI No EHI, no RHI RHI & EHI RHI, no EHI 65 + 10 66 66 65 + 8 months 6% 65 + 6 months 25% 66 65 + 4 months 65 + 2 months months 65 65 38% 65 64 2002 2003 2004 2005 2006 2007 2008 31% Source: U.S. Social Security Administration (2012). Source: Authors’ calculations using University of Michigan, Health and Retirement Study (HRS), 1996-2010. Two other changes in the Social Security program also increased incentives to work past the FRA, and Although researchers agree that Medicare eligi- thus past Medicare eligibility at age 65. The first was bility affects retirement decisions, its importance an increase in the Delayed Retirement Credit – the remained unclear because Social Security’s Full increment to monthly benefits awarded to workers Retirement Age (FRA), until 2003, was also 65. The who claim later than the FRA – from 5 percent a year FRA tends to be recognized as the government-desig- for workers who turned 65 in 1996 to an actuarial nated “normal” retirement age, a norm the program increase of 8 percent a year for workers who have had reinforced with financial incentives. A worker’s turned 65 since 2008 (see Figure 3). The second monthly benefit was actuarially reduced 6.7 percent change was the elimination, in 2000, of the Retire- for each year the worker claimed prior to the FRA. ment Earnings Test for workers older than the FRA. Until recently, monthly benefits were also given a less This change allowed workers to remain employed and than actuarially fair increase for each year a worker still collect their full monthly benefit, no matter how claimed after the FRA. Researchers assessing the role much they earned. of Medicare eligibility in retirement decisions thus had to disentangle the effects of these Social Security incentives, which encouraged retirement at the same Figure 3. Social Security Delayed Retirement age. Their efforts produced varying assessments of Credit, by Year Worker Turns Age 65 the importance of Medicare eligibility on the timing of retirement.6 9% 8.0% Recent changes in Social Security have decoupled 7.5% 7.0% the two program’s age-specific retirement incentives. 6.5% 6.0% Most important is the increase in Social Security’s 6% 5.5% 5% FRA from 65 to 66 (see Figure 2). This change 4.5% 4.0% pushed back the government-designated normal 3.5% 3.0% retirement age. It also reduced monthly benefits 3% claimed at 65 below their “full retirement” amount, which would encourage loss-averse individuals to 0% work to their FRA to get their “full” benefit. 19 89 19 91 19 93 19 95 19 97 20 99 20 01 20 03 20 05 7 08 -0 19 - - - - - - - - 20 90 92 94 96 98 00 02 04 06 Source: U.S. Social Security Administration (2012). Issue in Brief 3 Methodology and Data Medicare’s Effect on This analysis makes use of the recent separation of Retirement the Medicare eligibility age and Social Security’s FRA to assess the importance of Medicare in the timing A continuing spike in retirements at age 65 could of retirement. Following earlier studies, it uses the be due to factors other than Medicare eligibility. For likelihood that workers still employed will retire at example, 65 remains a standard “reference” retire- a given age as the metric for assessing the timing ment age and the traditional retirement age at many of retirements. The data come from the Health and employers. To assess the role of Medicare, the study Retirement Study (HRS), a biennial household panel estimated the effect of access to health insurance – survey of individuals over the age of 50, with retire- specifically employer-provided health insurance (EHI) ment defined as the first month that HRS respon- and employer-provided retiree health insurance (RHI) dents report being completely retired. – on the likelihood of retirement at age 65. If Social Security’s FRA and corresponding chang- The study focused on the retirement behavior of es in the benefit levels and accrual rates affect the tim- individuals still employed at age 64 with observable ing of retirement, the likelihood that workers would work histories to age 66.8 It ran regressions identify- retire at age 65 would fall, and the likelihood that they ing the effect of health insurance access and a broad would retire later would rise, as the FRA increased. range of worker characteristics on the likelihood of But if Medicare eligibility also affects the timing of retirement. These characteristics included race and retirement, a continuing spike in retirements will be ethnicity, education, marital status, health, wealth, evident at age 65. wages, pension coverage, cognitive functioning, Figure 4 shows that the increase in Social Secu- financial planning horizon, risk aversion, and self- rity’s FRA is clearly associated with workers pushing employment status. The regression includes interac- back their retirement age.7 The gray line shows the tions between an age-65 indicator variable and retiree monthly retirement rate for workers with an age-65 health insurance coverage. This approach allowed the FRA; the red line is for workers with an age-66 FRA. study to identify the effect of RHI on the likelihood of Workers with the higher FRA indeed retire later. In- retirement at age 65, when a worker becomes eligible terestingly, the figure also clearly shows a continuing for Medicare. spike in retirements at age 65. About 13 percent re- The regression results support the notion that tired at 65, more than four times the rate for months Medicare eligibility is an important factor in the deci- before 65. sions of workers without retiree health insurance to retire at age 65. The coefficient for the interaction between RHI and the age-65 variable indicates that Figure 4. Retirement Rate, by Social Security workers without retiree health insurance – who are Full Retirement Age expected to be more sensitive to Medicare eligibil- ity – are 6.5 percentage points more likely to retire 30% in the month they turn 65 than those who have RHI FRA = 65 coverage. FRA = 66 The regression results also help to quantify the 20% extent to which Medicare eligibility explains the spike in retirements among all workers at age 65. The re- tirement rate at age 65 is 8.7 percentage points higher 10% than the rate at age 64½, the regression baseline (10.6 percent at age 65 vs. 1.9 percent at age 64½). Using the regression results, the study estimated the retire- 0% ment rate at age 65 based on all worker characteristics, 62 62.5 63 63.5 64 64.5 65 65.5 66 then on all characteristics except whether the worker Age had RHI. The difference between these two estimates Notes: The age-65 line covers the 1931-1937 cohorts. The was 2.6 percentage points, or 30 percent of the 8.7-per- age-66 line covers the 1943-44 cohorts. The rates are for centage point spike at age 65. This finding suggests 2-month periods. that Medicare eligibility explains 30 percent of the Source: Coe, Khan, and Rutledge (2013). spike in retirements at age 65. 4 Center for Retirement Research Figure 5 reports results that drill down further Conclusion into how pre- and post-retirement health insurance coverage interact to influence the retirement decision. The results of this study support the notion that eli- These results derive from a separate regression that gibility for Medicare at age 65 is an important factor includes the interactions of an age 65-indicator, RHI, in retirement decisions. The study found workers and EHI, and then predicts the probability of retir- without retiree health insurance – those most affected ing at 65 for four groups: workers with both RHI and by the availability of Medicare benefits – are espe- EHI, workers with neither, or workers with just one cially likely to retire in the month they turn 65. Their or the other. increased propensity to retire when they become As expected, workers with EHI but not RHI – eligible for Medicare in fact accounts for about 30 those who would lose coverage should they retire percent of the continuing spike in retirements at age prior to age 65 – were especially sensitive to Medicare 65, now that the Social Security FRA has increased to eligibility. The predicted retirement rate for work- age 66. ers in this group was 13.0 percent in the month they Whether Medicare eligibility will remain impor- turned 65. The rate for workers who had neither RHI tant in the retirement decision going forward is hard nor EHI, workers who lacked health insurance prior to predict. Further declines in the prevalence and to becoming eligible for Medicare whether or not generosity of retiree health insurance benefits, and they retired, was 9.8 percent. The difference in the further increases in the cost of health care, should importance of Medicare was especially striking when increase its importance. At the same time, various ex- comparing workers with EHI but no RHI (the first perts advocate increasing the Medicare eligibility age bar) to those who did have RHI benefits (the third and to 67; if so, workers may opt to work longer. But the fourth bars). The predicted retirement rate for the health insurance exchanges created by the Affordable month these workers turned 65 was 7.7 percent for Care Act are projected to significantly expand access workers with both RHI and EHI, and 8.0 percent for and reduce the premiums for non-employer provided the smaller group with RHI and no EHI. insurance – especially for older workers. If coverage in the exchanges is comparable to Medicare cover- age, then workers may be freed to retire on their own Figure 5. Predicted Probability of Retiring at Age terms, and not have to wait for Medicare eligibility. 65, by Pre- and Post-Retirement Health Insurance Coverage 14% 13.0% 12% 9.8% 10% 7.7% 8.0% 8% 6% 4% 2% 0% EHI, no RHI No EHI, no RHI RHI + EHI RHI, no EHI Source: Authors’ calculations. Issue in Brief 5 Endnotes References 1 Coe, Khan, and Rutledge (2013). Behaghel, Luc and David M. Blau. 2012. “Framing Social Security Reform: Behavioral Responses to 2 See Monk and Munnell (2009) for a review. Changes in the Full Retirement Age.” American Economics Journal: Economic Policy. 4(4): 41-67 3 Medicaid beneficiaries and those who could obtain health insurance through their spouse would also be Blau, David M. and Donna Gilleskie. 2006. “Health insensitive to Medicare eligibility. These factors are Insurance and Retirement of Married Couples.” not included in Figure 1. Journal of Applied Econometrics 21:935-953. 4 COBRA coverage is available to workers for 18 Blau, David M. and Donna Gilleskie. 2008. “The Role months after leaving their job, but premiums are 102 of Retiree Health Insurance in the Employment percent of the full premium (employer- and employ- Behavior of Older Men.” International Economic ee-paid shares combined). Review 49(2): 475-514. 5 Individuals age 64 who were still employed were Coe, Norma B., Mashfiqur R. Khan, and Matthew much more likely to have health insurance coverage S. Rutledge. 2013. “Sticky Ages: Why Is Age 65 than all individuals that age. Among individuals age Still A Retirement Peak?” Working Paper 2013-2. 64 still working, as noted above, 44 percent had RHI Chestnut Hill, MA: Center for Retirement Re- and 56 percent had EHI; among all individuals that search at Boston College. age, only 33 percent had RHI and 37 percent had EHI. French, Eric and John Bailey Jones. 2011. “The Effects of Health Insurance and Self-Insurance on Retire- 6 See Rust and Phelan (1997); Blau and Gilleskie ment Behavior.” Econometrica 79(3): 693-732. (2006, 2008); and French and Jones (2011). Kopczuk, Wojciech and Jae Song. 2008. “Stylized 7 Also see Song and Manchester (2007); Kopczuk and Facts and Incentive Effects Related to Claiming of Song (2008); and Behaghel and Blau (2012). Retirement Benefits Based on Social Security Ad- ministration Data.” Working Paper WP2008-200. 8 The resulting sample included 3,717 individuals: Ann Arbor, MI: University of Michigan Retire- 2,109 with an age-65 FRA and 1,608 with a higher ment Research Center. FRA. Monk, Courtney and Alicia H. Munnell. 2009. “The Implications of Declining Retiree Health Insur- ance.” Working Paper 2009-15. Chestnut Hill, MA: Center for Retirement Research at Boston College. Rust, John and Christopher Phelan. 1997. “How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets.” Econometrica 65:781-831. Song, Jae and Joyce Manchester. 2007. “Have People Delayed Claiming Retirement Benefits? Responses to Changes in Social Security Rules.” Social Secu- rity Bulletin 67(2): 1-23. University of Michigan. Health and Retirement Study (HRS), 1996-2010. Ann Arbor, MI. U.S. Social Security Administration. 2012. The Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability In- surance Trust Funds. Table V.C3. Washington, DC: U.S. Government Printing Office. RETIREMENT RESEARCH About the Center Affiliated Institutions The Center for Retirement Research at Boston Col- The Brookings Institution lege was established in 1998 through a grant from the Massachusetts Institute of Technology Social Security Administration. The Center’s mission Syracuse University is to produce first-class research and educational tools Urban Institute and forge a strong link between the academic com- munity and decision-makers in the public and private sectors around an issue of critical importance to the Contact Information Center for Retirement Research nation’s future. To achieve this mission, the Center Boston College sponsors a wide variety of research projects, transmits Hovey House new findings to a broad audience, trains new schol- 140 Commonwealth Avenue ars, and broadens access to valuable data sources. 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