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How Do the Elderly Form Expectations? An Analysis of Responses to New Information

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  • B. Douglas Bernheim

Abstract

In this paper, I outline and test a simple theory that describes the evolution of expectations concerning social security benefits during the pre-retirement period. After correcting for the presences of measurement error, I obtain results that are consistent with this theory: expectations appear to evolve as a random walk, and innovations in this process are unrelated to previously available information. I also estimate responses of expectations to the arrival of new information. Although previous research indicates that individuals do not form expectations on the basis of all available information (and in particular ignore much of the information contained in concurrent statutory entitlements to social security benefits), responses to new information during the period immediately preceding retirement appear to be highly rational. The bulk of information affects the evolution of expectations only through its impact on actual benefit calculations. Furthermore, the data support the view that individuals form accurate assessments of the ultimate impact of new information on actual benefits.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2719.

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Date of creation: Sep 1988
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Publication status: published as How Do the Elderly Form Expectations? An Analysis of Responses to New Information , B. Douglas Bernheim. in Issues in the Economics of Aging , Wise. 1990
Handle: RePEc:nbr:nberwo:2719

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  1. B. Douglas Bernheim, 1987. "Social Security Benefits: An Empirical Study of Expectations and Realizations," NBER Working Papers 2257, National Bureau of Economic Research, Inc.
  2. Burtless, Gary, 1986. "Social Security, Unanticipated Benefit Increases, and the Timing of Retirement," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 781-805, October.
  3. B. Douglas Bernheim, 1987. "The Timing of Retirement: A Comparison of Expectations and Realizations," NBER Working Papers 2291, National Bureau of Economic Research, Inc.
  4. Arden Hall & Terry R. Johnson, 1980. "The determinants of planned retirement age," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 33(2), pages 241-254, January.
  5. Victor Zarnowitz, 1984. "Business Cycles Analysis and Expectational Survey Data," NBER Working Papers 1378, National Bureau of Economic Research, Inc.
  6. Kathryn Anderson & Richard V. Burkhauser & Joseph F. Quinn, 1986. "Do retirement dreams come true? The effect of unanticipated events on retirement plans," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 39(4), pages 518-526, July.
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Cited by:
  1. Adeline Delavande, 2005. "Measuring Revisions to Subjective Expectations," 2005 Meeting Papers 682, Society for Economic Dynamics.
  2. John Rust & Christopher Phelan, 1997. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Econometrica, Econometric Society, vol. 65(4), pages 781-832, July.
  3. Ahmed Khwaja & Frank Sloan & Sukyung Chung, 2007. "The relationship between individual expectations and behaviors: Mortality expectations and smoking decisions," Journal of Risk and Uncertainty, Springer, vol. 35(2), pages 179-201, October.
  4. Hugo Benítez-Silva & Debra S. Dwyer, 2003. "Expectation Formation of Older Married Couples and the Rational Expectations Hypothesis," Working Papers wp062, University of Michigan, Michigan Retirement Research Center.
  5. Hugo Benítez-Silva & Debra S. Dwyer & Wayne-Roy Gayle & Thomas J. Muench, 2003. "Expectations in Micro Data: Rationality Revisited," Working Papers wp059, University of Michigan, Michigan Retirement Research Center.
  6. Basit Zafar, 2009. "How do college students form expectations?," Staff Reports 378, Federal Reserve Bank of New York.
  7. Dickerson, Andy & Green, Francis, 2012. "Fears and realisations of employment insecurity," Labour Economics, Elsevier, vol. 19(2), pages 198-210.
  8. Maria G. Perozek, 2005. "Using subjective expectations to forecast longevity: do survey respondents know something we don't know?," Finance and Economics Discussion Series 2005-68, Board of Governors of the Federal Reserve System (U.S.).
  9. Hugo Benítez-Silva & Debra S. Dwyer, 2003. "What to Expect when you are Expecting Rationality: Testing Rational Expectations using Micro Data," Working Papers wp037, University of Michigan, Michigan Retirement Research Center.
  10. Hugo Benitez-Silva & Debra Dwyer, 2002. "Retirement Expectations Formation Using the Health and Retirement Study," Department of Economics Working Papers 02-04, Stony Brook University, Department of Economics, revised 18 Jun 2002.

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