Subjective Expectations, Social Security Benefits, and the Optimal Path to Retirement

57 Pages Posted: 6 Feb 2020

See all articles by María Prados

María Prados

University of Southern California

Arie Kapteyn

Dornsife Center for Economic and Social Research - University of Southern California; IZA Institute of Labor Economics

Date Written: November 1, 2019

Abstract

Americans face the challenges of retirement with varying degrees of preparation. Evidence indicates that that many individuals may not be making the best possible choices with respect to their Social Security and retirement savings. We assess the subjective expectations of non-retirees and find that they have sizable biases and uncertainty about future retirement benefits. This uncertainty and the level of subjective expectations can affect workers’ wealth accumulation and retirement readiness. We build on these observations and combine unique survey data with a life-cycle optimization model to measure the role of Social Security literacy, subjective expectations about retirement benefits, and behavioral traits as determinants of life-cycle savings decisions and welfare. The goal of this project is to better understand the role of retirement expectations as determinants of savings decisions and retirement income. We forecast future benefits and measure the bias in expectations. We find heterogeneity in the direction of the expectation bias: Men and those with low levels of uncertainty about retirement benefits are less likely to overestimate their future retirement benefits, hence are more likely to save more and reach retirement better prepared. We find that these biases in subjective expectations translate into suboptimal asset accumulation and welfare losses.

Keywords: subjective expectations, retirement, savings

JEL Classification: D14, D31, D9

Suggested Citation

Prados, Maria and Kapteyn, Arie, Subjective Expectations, Social Security Benefits, and the Optimal Path to Retirement (November 1, 2019). Michigan Retirement Research Center Research Paper No. 2019-405 , Available at SSRN: https://ssrn.com/abstract=3531728 or http://dx.doi.org/10.2139/ssrn.3531728

Maria Prados (Contact Author)

University of Southern California ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

HOME PAGE: http://dornsife.usc.edu/mprados/

Arie Kapteyn

Dornsife Center for Economic and Social Research - University of Southern California ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States
310-448-5383 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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