Retiree coverage can save public employers dollars: NBERNews added by Benefits Pro on October 16, 2013

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Joined: September 07, 2011

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By Paula Aven Gladych

Offering retiree health insurance to public-sector employees can actually save their employers money in the long run and has a major impact on whether workers stay in the workforce until age 65 or decide to retire earlier.

That’s according to a report by the National Bureau of Economic Research that studied the behavior of public school employees in Illinois to see how responsive they would be to the introduction of a retiree health insurance program. The findings have major implications for government budgets that have been overloaded with debt associated with pension benefits and retiree health care costs.

NBER found that the introduction of a retiree health insurance program prompted many older workers to retire earlier than they initially would have — an average of two years earlier.

Employees who retire earlier receive lower pension benefits but for a longer period of time than those who retire later.

The most direct cost of retiree health insurance in Illinois, the employer’s share of the current annual premium, is $5,208 per retiree aged 55 to 64, and less for older workers. This assumes the state continues its 50 percent subsidy of the premium, the report found.

Offered health insurance, the median retiree leaves at age 57 with 25 years of service rather than at 59 with 27 years of service. Because this median retiree is an early retiree and faces an actuarial penalty for retiring early, the present discounted value of her pension is $76,731 lower than if she had not had retiree health insurance, NBER said.

NBER concluded that if governments revoked their retiree health insurance, rather than saving themselves (and taxpayers) the lifetime costs of the retiree health insurance, $77,000, they would actually pay about $17,000 more per public school employee.

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