Health Insurance and Early Retirement Plans: Evidence from the Affordable Care Act

Employer sponsored retiree health benefits are an important source of insurance for millions of retirees in the US. However, since the early 1990s there has been a steady erosion of retiree benefits, with the share of large employers offering retiree benefits. These declines coupled with increasing health care costs negatively impact the retirement security of older adults and influence their labor supply decisions. Previous studies have shown that individuals with access to retiree coverage are more likely to retire early compared to persons without retiree coverage.

The 2010 Affordable Care Act (ACA) is expected to address these concerns to a large extent by significantly increasing access to affordable health insurance coverage. The expansion of the Medicaid program up to 138% of the Federal Poverty Line (FPL), the establishment of insurance exchanges and the availability of federal subsidies to purchase insurance for persons with income less than 400% of FPL are all expected to increase workers’ access to insurance that is not tied to employment. In addition, the ACA includes several provisions that are specifically targeted towards retirees. For example, the temporary Early Retiree Reinsurance Program provided funds to employer sponsored retiree plans to encourage employers to continue offering retiree benefits. Retiree-only plans are also exempted from some costly requirements such as no cost sharing for preventive benefits or no limits on essential health benefits.

Using data from the Health and Retirement Study (HRS), I examine the extent to which the ACA influenced the retirement plans of working older adults. Specifically, I estimate its impact on the self-reported probability that an individual will continue to work past age 62, the earliest age at which individuals may claim Social Security benefits. These subjective probabilities have been shown to strongly predict actual retirement in the future. To identify causal effects, I employ a difference-in-differences (DiD) strategy that compares individuals who had access to retiree coverage prior to 2010 with individuals who did not have such coverage. The comparison groups are defined based on retiree benefits prior to the ACA to avoid concerns about reverse causality, since the ACA may also affect employers’ offers of retiree benefits. The DiD model estimates pre vs post 2010 changes in the subjective probability of working past age 62 among persons with retiree coverage relative to persons without retiree coverage.

I find a significant decrease in the likelihood of working past age 62 after 2010 among persons who did not have retiree coverage relative to persons who had coverage. In other words, greater access to affordable insurance due to the ACA increased early retirement plans among persons without employment based retiree benefits. Event study regressions find no evidence of differential pre-existing trends between the comparison groups that might explain these effects and the DiD estimates are robust to a wide range of specification checks. Heterogeneity analysis suggests that the groups that stand to gain the most from the ACA are also more responsive to the policy change (e.g., low income persons who are eligible for federal premium subsidies).