It is hard to answer a question without fully understanding the issue involved.  So the best place to start to answer our question is with a definition.

What is "Job Lock"?

Job Lock is usually defined as "a reduction in workers' willingness to quit their jobs arising from the risk of losing health coverage" (Federal Reserve 1998). Employment-related health insurance is a central component of employee compensation—it is no longer a "fringe benefit." As the cost of health care continues to rise, there is both anecdotal and scientific evidence that employee decisions to change employment, including the change from work to retirement, are as much (if not more) influenced by health insurance benefits as by such traditional employment factors as salary, pension, location, and job content.

As the cost of both health care and health insurance increases, workers are increasingly worried about the possibility of losing their health insurance and so may not seriously think about job changes in their financial and personal planning. In 1998, the Employee Benefit Research Institute concluded that "job lock is a growing problem with 27 of  Americans age 20 and older reporting that they or an immediate family member had experienced some form of job lock, up from just 13 in 1991" (Employee Benefit Research Institute 1998).

Job Lock and Retirement Planning

The decision to retire, like the decision to change jobs, is similarly linked to the loss of employer-based health insurance—but with four important differences (and complications).

1. As a kind of "job change," retirement is a more or less permanent move out of the labor force and not simply a change from one employer and "fringe benefit" package to another.

2. From both the maturational aging and the generational cohort perspectives, retiree health insurance (and therefore the retirement decision) is inextricably intertwined with Medicare. Consider the "cohort psychology" of today's preretirees. Those who are 55 to 60 years old in 2003 (bom 1943 to 1948) were 17 to 22 years old when Medicare became law in 1965. Thus these middle-agers have spent their entire adult work lives anticipating the availability of a national program of health insurance benefits upon their retirement.

3. Medicare eligibility was set at age 65 at a time when the "official" retirement age, that is the Social Security full benefits retirement age, was also 65. Although nowadays more people retire early—at age 62 with reduced Social Security benefits, or even younger because withdrawals from most defined contribution accounts can be made without penalty as early as age 59 ½ - eligibility for Medicare health insurance remains at age 65.

4. Previously, many employers provided paid or subsidized retiree health insurance.  In response to Financial Accounting Standards Board (FASB) standards implemented m 1990, however many of these retiree health insurance benefits have been scaled back or eliminated (Cutler 2002b).

A consequence of these several personal and policy trends is that job lock related to

health insurance is a real and complex factor in the retirement decision process for middle-aged and older workers: "There is clear and unambiguous evidence that health insurance is a central determinant of retirement decisions" (Gruber and Madnan 2002).

New Evidence

In 2002 the Health Confidence Survey (HCS)-a continuing survey of Americans of all ages toward health care issues-included several questions probing the connection between health insurance coverage and the retirement decision (Employee Benefit Research Institute 2002). Because a fifth of the national sample of 1,000 adults said they are retired the survey asked both projective and retrospective questions about the retirement planning process. We start with the basic question: "When determining what age to retire, how much did [do] you think about access to health insurance benefits?

Although those already retired thought about health insurance a bit more than do future retirees, the magnitude of concern is parallel. Access to health insurance benefits was and is an important element of the retirement decision.

Because both retirement behavior (early versus age 65) and employer health insurance practices are changing, respondents were asked if they expect to receive health insurance from or through their employer before their Medicare benefits become available. Future retirees who said they plan to retire earlier than age 65 were asked: "How do you expect to get health insurance between [retirement age given] and when you are eligible to receive Medicare?" The parallel question was asked of retirees who retired before age 65.

There is clearly a shift in the role of the employer. Fewer than half (43) of those who currently plan to retire early see employer-provided health insurance as their "bridge" to Medicare, compared to two-thirds (65) of current retirees who retired before age 65. Even these 43 may find their optimistic expectations blunted when they begin

to engage the "fine print" of the retirement process. What is more clear, however, is that compared to current retirees these future early retirees do not intend to be uninsured (1 versus 11). Four times as many pre-retirees intend or hope to be able to purchase health insurance from personal funds.

Alternatively, a more direct response to the declining role of an employer-provided (or -subsidized) insurance bridge to Medicare would be a postponement of retirement until Medicare eligibility arrives; in other words, health insurance job lock. To assess this directly, the Health Confidence Survey asked the following question of respondents who said that their employer offers pre-Medicare health insurance and who currently plan to retire early (about 25 of the sample of those not retired): "Would you retire before you are eligible for Medicare if a former employer or union did not provide health insurance benefits for retirees?"

The implications of this pattern of expectations for job lock are fairly clear: twice as many people would change their current plans and would not retire early.

Additional Job Lock Complexity

Finally, from the perspective of financial gerontology there are at least three additional health insurance job lock complexities that are central components of retirement planning.

First, employment-connected health insurance is typically health insurance for the whole family. Consequently, the worker's own age, retirement, and Medicare eligibility are not the only variables in the equation. Continued health insurance for a spouse and young-adult children are also part of retirement planning and thus become critical elements of the job lock situation.

Second, declines in health insurance benefits and declines in pension benefits do not have equal impact. Families can respond to a decline retirement income in several ways: discretionary purchases can be postponed, permanent or temporary changes can be made in residence or lifestyle, and larger withdrawals can be made from some retirement accounts. Not so for health insurance. People cannot simply decide to not be sick next month. Consequently, job lock is more likely to be a response to the risk of losing health insurance than to losing retirement income opportunities.

Third is financial literacy. The Financial Literacy 2000 survey (Cutler 1997) documented a frighteningly low level of knowledge in this context: substantial proportions of the public (1) thought they almost automatically would receive employer-provided health insurance alongside receiving a company pension and (2) also did not know that Medicare does not begin until age 65. This Medicare illiteracy was more recently reconfirmed by the 2001 Health Confidence Survey. Only 38 of respondents knew that Medicare eligibility begins at age 65; 18 cited ages younger than 65, 4 said "when eligible for Social Security," and 32 said "don't know" (Employee Benefit Research Institute 2001).

References

Cutler, Neal E. 1997. "The False Alarms and Blaring Sirens of Financial Literacy: Middle-Agers' Knowledge of Retirement Income, Health Finance, and Long-Term Care." Generations 21 (Summer): 34-40.

Cutler, Neal E. 2002a. Advising Mature Clients: The New Science of Wealth Span Planning. New York: John Wiley & Sons.

Cutler, Neal E. 2002b. "Job Lock and Financial Planning: The Impact of Health Insurance on the Retirement Decision." Journal of Financial Service Professionals (November): 29-32.

Employee Benefit Research Institute. 1998. EBRI News Release, August 7.

Employee Benefit Research Institute. 2001. "Medicare: Awareness, Confidence, Satisfaction, and Reform." Facts from EBRI. October. Available online at http://www.ebri.org/facts/0701fact.pdf.

Employee Benefit Research Institute. 2002. "2002 Health Confidence Survey: Summary of Findings." Fifth in Continuing Series. September. Available online at http://www.ebri.org/hcs/2002/hcs02sof.pdf.

Federal Reserve Bank of San Francisco. 1998. "Health Insurance and the U.S. Labor Market."

News Release, April 13.

Gruber, Jonathan, and Brigitte C. Madrian. 2002. "Health Insurance, Labor Supply, and Job Mobility: A Critical Review of the Literature." NBER Working Paper No. W8817. Cambridge, MA: National Bureau of Economic Research, February.