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Imperfect Knowledge, Retirement and Saving

  • Alan L. Gustman
  • Thomas L. Steinmeier

Using data from the Health and Retirement Study, this paper creates variables measuring knowledge about future social security and pension benefits by comparing respondent reports of their expected benefits with benefits calculated from social security earnings records and employer provided descriptions of pension plans. The knowledge measures suggest that misinformation, imprecision and lack of information about retirement benefits is the norm. Those who are most dependent on social security are the least well informed about their social security benefits, while those who are most dependent on pensions are best informed about their pension benefits. Women and minorities are less well informed about both types of retirement benefits. Having documented the extent of misinformation, we turn to questions about the production of information, and the consequences of misinformation for real outcomes. Relating measures of information to planning activities, we find that those who plan are somewhat better informed than those who do not, but with the exception of having requested a social security earnings record, the effects of planning activities on knowledge are modest. In descriptive and reduced form equations for planned and actual retirement and saving, there is at best a modest relation of knowledge measures to planned and actual retirement and to nonpension, nonsocial security wealth as a share of lifetime earnings. Individuals who overestimate their benefits are likely to retire sooner than they planned, but the measured effects are relatively modest. Coefficients of measures of the increase in reward from postponed retirement are barely affected by the addition of measures of respondent knowledge of their retirement benefits to standard reduced form retirement and wealth equations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8406.

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Date of creation: Aug 2001
Date of revision:
Publication status: published as Alan L. Gustman and Thomas L. Steinmeier. “Imperfect Knowledge of Social Security and Pensions”. Industrial Relations. Vol. 44, No. 2 (April, 2005): 373 -395.
Handle: RePEc:nbr:nberwo:8406
Note: AG LS
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  1. Alan L. Gustman & Thomas L. Steinmeier, 1998. "Effects of Pensions on Saving: Analysis with Data from the Health and Retirement Study," NBER Working Papers 6681, National Bureau of Economic Research, Inc.
  2. Patrick J. Bayer & B. Douglas Bernheim & John Karl Scholz, 1996. "The Effects of Financial Education in the Workplace: Evidence from a Survey of Employers," NBER Working Papers 5655, National Bureau of Economic Research, Inc.
  3. B. Douglas Bernheim, 1987. "Social Security Benefits: An Empirical Study of Expectations and Realizations," NBER Working Papers 2257, National Bureau of Economic Research, Inc.
  4. Alan L. Gustman & F. Thomas Juster, 1995. "Income and Wealth of Older American Households: Modeling Issues for Public Policy Analysis," NBER Working Papers 4996, National Bureau of Economic Research, Inc.
  5. James H. Stock & David A. Wise, 1988. "Pensions, The Option Value of Work, and Retirement," NBER Working Papers 2686, National Bureau of Economic Research, Inc.
  6. Thaler, Richard H, 1994. "Psychology and Savings Policies," American Economic Review, American Economic Association, vol. 84(2), pages 186-92, May.
  7. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
  8. B. Douglas Bernheim & Daniel M. Garrett, 1996. "The Determinants and Consequences of Financial Education in the Workplace: Evidence from a Survey of Households," NBER Working Papers 5667, National Bureau of Economic Research, Inc.
  9. Sewin Chan & Ann Huff Stevens, 2001. "Retirement Incentives and Expectations," NBER Working Papers 8082, National Bureau of Economic Research, Inc.
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