Retirement Lock and Prescription Drug Insurance: Evidence from Medicare Part D

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I examine whether the lack of an individual market for prescription drug insurance causes individuals to delay retirement. To do so I use quasi-experimental evidence from the introduction of Medicare Part D, that provided subsidized prescription drug insurance to all Americans over age 65 beginning in 2006. Using a differences-in-differences design, I compare the labor outcomes of individuals turning 65 just after 2006 to those turning 65 just before 2006 in order to estimate the causal effect of eligibility for Part D on labor supply. I find that individuals at age 65 who would have otherwise lost their employer-sponsored drug insurance upon retirement decreased their rate of full-time work by 8.4 percentage points due to Part D, compared to individuals with retiree drug insurance even after age 65 for whom no significant change was observed. This reduction was composed of an increase of 5.9 percentage points in part-time work and 2.5 percentage points in complete retirement. I use these estimates to quantify the extent of the distortion due to drug insurance being tied to employment and the welfare gains from the subsidy correcting that distortion. The results suggest that individuals value $1 of drug insurance subsidy as much as $3 of Social Security wealth.

Last updated on 11/16/2015