The Welfare Costs of Misinformation

66 Pages Posted: 31 Oct 2023

See all articles by Neha Bairoliya

Neha Bairoliya

Marshall School of Business - University of Southern California

Kathleen McKiernan

Vanderbilt University - College of Arts and Science - Department of Economics

Date Written: October 17, 2023

Abstract

Social Security (SS) benefits, with an average replacement rate of around 40 percent, serve as an important source of retirement income for older Americans. Yet, the size of lifetime benefits a household receives depend on a myriad of factors, including the age of benefit claim and labor supply decisions. Given the complexity of the associated rules, many households may lack understanding of one or more aspects of the system. In this work, we use a lifecycle model of consumption, savings, labor supply, and Social Security application decisions to study the welfare impact of such misinformation. Our findings indicate significant welfare losses stemming from misinformation, especially when it causes individuals to strongly over-estimate the value of future entitlements. Additionally, we show that the Social Security Statement program, a large public information campaign, must inform only 5.5 percent of misinformed individuals in order for aggregate benefits of information to outweigh aggregate costs.

Keywords: Retirement, Social Security, Misinformation, Life-Cycle

JEL Classification: J14, J26, E21, H55

Suggested Citation

Bairoliya, Neha and McKiernan, Kathleen, The Welfare Costs of Misinformation (October 17, 2023). Available at SSRN: https://ssrn.com/abstract=4605591 or http://dx.doi.org/10.2139/ssrn.4605591

Neha Bairoliya (Contact Author)

Marshall School of Business - University of Southern California ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Kathleen McKiernan

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

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