Irrational Expectations Concerning Future Social Security Benefits: United States, Canada, and Ireland

Irrational Expectations Concerning Future Social Security Benefits: United States, Canada, and Ireland

John Turner, Sasai Zhang, Gerard Hughes, and David M. Rajnes

Conference paper

16th International Workshop on Pensions, Insurance and Savings

2018

Expectations play a major role in both macroeconomic and microeconomic theory. While a number of surveys have asked questions concerning workers’ expectations as to their future social security benefits, these expectations have not been the subject of extended analysis. This study examines surveys of workers’ expectations as to their future social security benefits in the United States, Canada and Ireland. Because social security benefits are an important source of retirement income for most people in these countries, workers’ expectations as to their future social security benefits presumably play an important role in their consumption, saving and portfolio investment decisions. In all three countries, while we find heterogeneity in the expectations of workers, in some surveys, a surprisingly high percentage of young workers expect that they will not receive future social security benefits. While the most obvious explanation for such pessimism in the United States is the projected financial shortfall in 2034, we find such pessimism in a U.S. survey in 1996 and in surveys in Canada, where recently benefits were increased. We identify young age and financial illiteracy as two causes of unrealistic expectations as to future social security benefits. The rational and behavioral expectations models can be combined in a theory of marginal rational expectations, where people’s expectations as to future social security benefits are affected by behavioral biases and financial illiteracy but improve with age. Underestimating future social security benefits apparently does not lead to greater retirement readiness as a reaction to the perceived reduced generosity of social security, perhaps because young workers are not engaged in much saving for retirement, but that area merits further investigation.