Impact of Retiree Health Plans on Faculty Retirement Decisions†

This paper considers the effect of retiree health insurance coverage on retirement decisions of academics, and attempts to answer two key questions of interest in this conference volume: 1) how do retiree health insurance plans affect retirement decisions? and 2) if retiree health plans are cut back or eliminated, by how much will faculty delay their retirements? I argue that the risk of uninsured health care costs is a major consideration affecting faculty retirement decisions, and via computer simulations, I show that naive attempts to cut costs by eliminating retiree health insurance can end up increasing rather than saving total costs of compensation, since it induces faculty to delay retirement and thus increases the cost of wages, health insurance and other fringe benefits over longer employment durations. These issues are of increasing relevance, since the rapid rise health care costs and health insurance premiums is putting increasing pressure on employers to limit health insurance coverage, or in some cases to eliminate retiree health plans altogether. Thus, colleges and universities face a difficult cost/benefit tradeoff in designing retirement and compensation packages. This paper develops a prototype “life cycle model” of a faculty member’s retirement decision that accounts for the incentives created by their pension plan provisions (including defined benefit and defined contribution plans), the effect of private and public disability insurance plans, and the provisions of their health insurance coverage — both while employed as well as their retiree health insurance coverage, if any, during retirement. I use this model to illustrate the important impact of changes in retiree health insurance coverage on retirement decisions, in experiments that predict by how much academics will delay retirement if retiree health insurance is eliminated, or the level of coverage is reduced. I use the model to perform cost/benefit calculations from the standpoint of an academic institution as to whether it is more cost effective to provide more generous retiree health insurance coverage or limit these benefits in various ways. I show that there are “compromise packages” such as continuing retiree health insurance until Medicare eligiblity age (currently age 65), that are significantly less costly than the policy of providing retiree health insurance regardless of age, or eliminating retiree health insurance benefits altogether.