Retiree health insurance and wealth

In a new study published in the Journal of Health EconomicsRobert Clark and Olivia Mitchell find that retiree health insurance—coverage offered by employers to their retired workers—substitutes for wealth that workers would otherwise have accumulated.

Economic theory predicts that employer-provided group retiree health insurance [RHI] coverage can reduce employee incentives to save during their working careers. […]

[W]e show that public sector employees covered by retiree health plans had substantially less wealth than otherwise similar private sector employees lacking retiree health insurance. In particular, Federal workers had about $82,000 (18%) less net wealth inclusive of [defined contribution] assets, compared to private sector employees lacking RHI. Interestingly, this is not far from the total value of a lifetime of fully subsidized RHI calculated at approximately $75,000. We also find that state/local workers with RHI accumulated about $69,000 (or 15%) less net wealth than their uninsured private sector counterparts. After controlling on socioeconomic and pension coverage differences, the Federal employee gap in net wealth was even larger, on the order of $116,000, and the difference is measured with statistical precision.

I’m so used to findings of irrational behavior, particularly in the realm of health care, that when a study actually shows people behave rationally, I’m surprised. Score one for economics. Will the availability of subsidized coverage through new Marketplaces (exchanges) reduce accumulation of wealth?

Potential caveat: One thing I couldn’t discern from the paper was weather the investigators could control for the differences in earnings across employers that do and do not offer RHI. Perhaps those that offer RHI tended to pay lower wages (essentially deferring compensation until retirement, in the form of RHI). Naturally, with lower income, one might save less, all else held constant. The analysis in the paper controlled for household income, but that seemed to be current household income—in retirement—not income during working years.

On the other hand, so what? If RHI-offering employers pay less, then the results means that either you get RHI or you get higher income and future wealth it lets you sock away. If they don’t, then the results say that if you get RHI, you factor that in and save less. Either your employer is basically making (forcing) the savings decision for you by paying you less if it offers RHI or you are. I can’t tell which from the paper.

Maybe I missed something. If anyone reads the paper closely and finds something that suggests I have, let me know.

UPDATE: Olivia Mitchell shared by email:

First, the respondents to the survey were not retired. Second, we included earnings in household income.


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