Happy Together or Home Alone: A Structural Model of the Role of Health Insurance in Household Joint Retirement

The baby boomers are approaching retirement, and the majority of them are married. Simultaneously,
employers are less likely to provide retiree or spousal health insurance, making it important to understand how health insurance affects couples’ joint retirement decisions. I develop a dynamic programming model of household retirement in which married couples jointly decide when to retire, how to use available insurance, and how much to save. Insurance plans vary by plan characteristics (including premium, deductible, and coinsurance rates). The members of each couple coordinate their retirement decisions in response to the
following motivations: (1) they share economic resources through the household budget constraint; (2) they care about spending leisure time with each other; and (3) their health insurance coverage choices are interdependent. I also model two channels through which people value health insurance: (1) insurance smooths consumption by reducing the mean and volatility of medical expenses; and (2) insurance can improve health and thus decrease individuals’ value of leisure relative to work.

I estimate my model with Maximum Simulated Likelihood estimation using data from the Health and Retirement Study and the Medical Expenditure Panel Survey. I find that employer-provided health insurance (EPHI) plays an important role in retirement decisions. For workers with tied health insurance, who lose employer-provided coverage if they retire, gaining employer-provided retiree coverage would decrease the average retirement age by 1.1 and 0.5 years for husbands and wives, respectively. Similarly, raising the
Medicare eligibility age is predicted to delay retirement (by 0.7 and 0.4 years), while the Affordable Care Act (ACA), which makes health insurance independent of employment status, is predicted to accelerate it (by 0.4 and 0.3 years). The effects of Medicare are bigger than the effects of the ACA but smaller than the effects of EPHI due to the differences in plan quality, which has been overlooked in the previous literature. In addition, in decomposing the employment response to EPHI coverage, I find that over 80% of the response reflects the valuation of the consumption smoothing effects of health insurance, and less than 20% reflects the valuation of the health improvement effects. Furthermore, I find that spousal coverage motivates simultaneous retirement by delaying husbands’ retirement and accelerating wives’ retirement, and it explains about one-fourth of the simultaneous retirement observed in the data. Lastly, I find that husbands and wives enjoy spending leisure time together, which explains nearly one-third of the observed simultaneous retirement.