Do better–informed workers make better retirement choices? A test based on the Social Security Statement

Abstract

Economic models of retirement implicitly assume that workers know their future benefi ts as a function of their retirement age and are able to compare future streams of benefi ts. Empirical evidence, however, suggests that these are strong assumptions. When asked, only around 50 percent provide an estimate of their expected Social Security benefi ts (Bernheim and Levin 1989; Gustman and Steinmeier 2001).1 Gustman and Steinmeier (2001) show that less than 30 per-cent of respondents are able to estimate their future benefi ts to within about $1,500 per year. Moreover, Lusardi and Mitchell (2006) show that fi nancial illiteracy is widespread among older Americans. Only half of the age 50+ respon-dents can correctly answer two simple questions regarding interest compounding and infl ation. Is it then reasonable to assume that those same respondents are able to compute

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