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

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 con- tained in concurrent statutory entitlements to social security benefits), responses to new information during the period immediately preceding retire- ment 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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