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The effects of health insurance and self-insurance on retirement behavior

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Author Info
Eric French
John Bailey Jones

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Abstract

Using an estimable dynamic programming model of retirement behavior, this paper assesses the relative importance of Medicare and Social Security in determining job exit rates at age 65. Of central importance is whether individuals value health insurance benefits not just for the reduction in average medical expenses, but also for the reduction in the volatility of medical expenses. To address this problem the model accounts explicitly for the effects of health cost volatility and health insurance on retirement behavior. By including a savings decision within the model, we allow for the possibility that individuals can self-insure against health cost shocks. Self-insurance potentially reduces an individual's valuation of health insurance. Using data from the Health and Retirement Survey, we find that the reduction in expected medical expenses explains 75% of a typical individual's valuation of health insurance, with the reduction in volatility explaining the remaining 25%. We find that shifting the Medicare eligibility age to 67 will delay age of retirement. However, shifting the Social Security normal retirement age to 67 will cause a larger retirement delay than shifting the Medicare eligibility age to 67.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-01-19.

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Date of creation: 2001
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Handle: RePEc:fip:fedhwp:wp-01-19

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Keywords: Insurance; Health ; Medical care;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  33. Jonathan Gruber & Brigitte Madrian, 1993. "Health Insurance and Early Retirement: Evidence from the Availability of Continuation Coverage," NBER Working Papers 4594, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  34. Donna B. Gilleskie & David M. Blau, 2006. "Health insurance and retirement of married couples," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(7), pages 935-953. [Downloadable!]
  35. David M. Blau & Donna B. Gilleskie, 2003. "The Role of Retiree Health Insurance in the Employment Behavior of Older Men," NBER Working Papers 10100, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Donna B. Gilleskie & David M. Blau, 2006. "Health insurance and retirement of married couples," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(7), pages 935-953. [Downloadable!]
  2. Karen Kopecky & Tatyana Koreshkova, 2009. "The Impact of Medical and Nursing Home Expenses and Social Insurance Policies on Savings and Inequality," Working Papers 09006, Concordia University, Department of Economics. [Downloadable!]
    Other versions:
  3. Motohiro Yogo, 2009. "Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing, and Risky Assets," NBER Working Papers 15307, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Mariacristina De Nardi & Eric French & John Bailey Jones, 2006. "Differential Mortality, Uncertain Medical Expenses, and the Saving of Elderly Singles," NBER Working Papers 12554, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Mette Ejrnaes & Stefan Hochguertel, 2008. "Entrepreneurial Moral Hazard in Income Insurance," Tinbergen Institute Discussion Papers 08-065/3, Tinbergen Institute. [Downloadable!]
  6. Mette Ejrnæs & Gabriel Stefan Hochguertel, 2008. "Entrepreneurial Moral Hazard in Income Insurance: Empirical Evidence from a Large Administrative Sample," CAM Working Papers 2008-02, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics. [Downloadable!]
  7. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the elderly save? the role of medical expenses," Working Paper Series WP-09-02, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  8. Jody Schimmel, 2006. "Men With Health Insurance and the Women Who Love Them: the Effect of a Husband's Retirement on His Wife's Health Insurance Coverage," Working Papers wp131, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
  9. David Love, 2008. "The Effect of Marital Status and Children on Savings and Portfolio Choice," Department of Economics Working Papers 2008-13, Department of Economics, Williams College. [Downloadable!]
  10. Eric French & John Bailey Jones, 2004. "On the distribution and dynamics of health care costs," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 705-721. [Downloadable!]
  11. Wilbert van der Klaauw & Kenneth I. Wolpin, 2005. "Social Security and the Retirement and Savings Behavior of Low Income Households," PIER Working Paper Archive 05-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
    Other versions:
  12. John Bound & Todd Stinebrickner & Timothy Waidmann, 2007. "Health, Economic Resources and the Work Decisions of Older Men," NBER Working Papers 13657, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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