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

In: Issues in the Economics of Aging

  • B. Douglas Bernheim

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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This chapter was published in:
  • David A. Wise, 1990. "Issues in the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise90-1, August.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 7120.
    Handle: RePEc:nbr:nberch:7120
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    Web page: http://www.nber.org
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    1. B. Douglas Bernheim, 1989. "The Timing of Retirement: A Comparison of Expectations and Realizations," NBER Chapters, in: The Economics of Aging, pages 335-358 National Bureau of Economic Research, Inc.
    2. B. Douglas Bernheim, 1987. "Social Security Benefits: An Empirical Study of Expectations and Realizations," NBER Working Papers 2257, National Bureau of Economic Research, Inc.
    3. 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.
    4. 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.
    5. Victor Zarnowitz, 1984. "Business Cycles Analysis and Expectational Survey Data," NBER Working Papers 1378, National Bureau of Economic Research, Inc.
    6. 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.
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