Impact of Retiree Health Insurance in the Public Sector

January 2014

Most state and local government employees are covered by health plans that extend coverage to retired employees. Relatively few studies have examined how public employees respond to these incentives. To examine how retiree health plans influence worker decisions and government budgets, the National Bureau of Economic Research (NBER) convened a conference in August 2013 and commissioned papers by nationally prominent researchers to examine how these plans affect workers and government employers.

This report summarizes the findings of the research presented at the conference. Each of the papers provides insights into important effects of retiree health plans in the public sector and how these plans affect work and retirement, choice of retirement plans, and retirement saving. Together, these papers clearly show that the promise of health insurance in retirement induces workers to retire earlier and save less. In addition, changes in plan design influence the choice of health plans of retirees. Thus, when managers are deciding to modify or eliminate retiree health plans in an effort to reduce labor costs, they should consider how employees might alter their behavior in responses to such changes and how employee actions might affect total labor cost. The research also indicates that retiree health plans are a valuable benefit and the elimination of these plans would make public sector jobs less desirable.