Older state employees value a dollar of retiree health insurance (RHI) twice as much as a dollar of pension benefits, according to a new working paper from the Center for Retirement Research at Boston College that quantifies how workers nearing retirement actually trade off one form of deferred compensation against another.

The finding should make HR and benefits leaders rethink who really pays when an employer trims retiree health coverage. The authors — Laura D. Quinby and Gal Wettstein — argue that decades of RHI cuts may have cut the wrong benefit.

What did the data show?

The study leans on a 2008 reform in Rhode Island state government. Retirement-eligible employees faced a choice: leave state service by September 30, 2008 and keep the existing generous RHI, or keep working, accrue additional pension wealth, and accept a leaner RHI package.

The preferred causal estimate puts the impact of RHI at 0.6 percentage points of additional retirement for every $1,000 of benefits lost. The corresponding figure for pension wealth — 0.3 percentage points for every $1,000 of accruals foregone — is exactly half as large.

The conclusions rest on two matched cohorts:

• 456 state employees who reached normal retirement age between September 30, 2007 and September 30, 2008, when the RHI cut shaped their decision.
• 472 employees who reached retirement age a year earlier, with no RHI reform driving their choice.
• Both cohorts averaged 54.5 years old, with 24 years of tenure, and were 51 to 58 percent female.

Why does this matter for HR?

RHI has been quietly disappearing from U.S. compensation packages. The share of large employers offering retiree health benefits dropped from 66 percent in 1988 to roughly 30 percent today, the brief notes. Cuts have reached even the public sector, where RHI had been near-universal — in 2014, virtually all government employers offered it.

Yet the evidence suggests employers may be trimming the benefit their older workers value most. Researchers frame the contradiction directly: if workers value RHI so highly, why have employers cut back so dramatically?

One answer is institutional rather than economic. RHI typically lacks the constitutional and statutory protections that shield pension benefits, which makes it the easier line item for state and local governments to reduce under budget pressure. That asymmetry may have led HR and finance teams to systematically underweight the workforce impact of RHI cuts.

How should employers respond?

The paper's policy implication cuts against the prevailing trend. Rather than continuing to shift retirement benefits away from RHI, the authors argue, governments looking to cut deferred-compensation costs would do better to reallocate toward RHI — precisely the benefit employees rank above pensions on a dollar-for-dollar basis.

Open questions for compensation and benefits leaders:

• Should employers treat expanded RHI as a retention lever for older workers considering early retirement?
• How does the 2-to-1 valuation ratio shift the calculus around defined-contribution health arrangements, where employees direct their own funds?
• Does the trade-off look the same in the private sector, where the competing benefit is usually today's cash rather than tomorrow's pension?

Health benefits also carry non-cash advantages: employer premiums generally escape income and payroll taxes, group plans face less adverse selection than individual-market coverage, and administrative overhead is lower. Those features, the authors note, may push RHI's perceived value higher still.

What comes next?

The authors leave the parallel decline in private-sector RHI as a question for future research. Worker preferences may differ across sectors, or private employers and employees may simply trade today's salary for tomorrow's health insurance more cheaply than public-sector workers do. Either outcome has direct implications for how HR teams design deferred pay.

For now, the 2-to-1 valuation ratio gives benefits leaders a quantitative case to put on the table when finance asks which retirement fringes to protect — and which to keep cutting.