Economic Snapshot | Trade and Globalization

Would-be retirees working longer for insurance benefits

Snapshot for July 2, 2003.

Would-be retirees working longer for insurance benefits

For years, older workers have kept on working longer. Since 1985, the labor force participation rate of the “near elderly,” (those between the ages of 55 and 64), has risen, particularly in 2001 and 2002, when it rose by almost 3 percentage points. Although stock market losses played a role, the rise in health care costs and the reduction of retirement health insurance were the most influential factors in keeping older workers in the labor force.

Near-elderly labor force participation and medical costs

Wall Street’s current economic fall began in March 2000. Household financial wealth declined by $4.4 trillion in the first 12 months and by an additional $1 trillion across the next 12 months of the crash. However, during the year of the largest wealth decline, from March 2000 to March 2001, the labor force participation rate of the near elderly increased only by 0.6 percentage points, compared to 0.8 percentage points in the following 12 months.

In comparison, rising health care costs and declining access to retiree health insurance have been consistent trends. Specifically, the near elderly need more prescription drugs and visit the hospital more often than younger workers. The costs of these medical expenses have been rising almost twice as fast as inflation since the 1980s.

At the same time, access to retiree health insurance declined. According to a 2001 report from the General Accounting Office, 70% of employers offered retiree health care in the early 1980s, whereas only 40% did in 1998. Similarly, the Kaiser Family Foundation reported in 2002 that 66% of firms with more than 200 employees offered health coverage to retirees in 1988 compared to only 34% in 2002.

In other words, declining access to retiree health insurance and rising health care costs are much more consistent factors than changes in stock market wealth, and thus a better explanation for the fact that more near elderly continue to work. Between 1985 and 2002 there is a strong positive correlation between medical costs and the labor force participation rates of the near elderly (see figure). It is likely that older workers, who tend to experience more health problems, will work increasingly longer just to maintain their access to health insurance.

Source: Bureau of Labor Statistics, Consumer Price Index for Medical Costs, and the Bureau of Labor Statistics, Current Population Survey.

This week’s snapshot was written by Christian E. Weller.

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