Irrational Expectations, Future Social Security Benefits, and Life Cycle Planning

Abstract

An extensive amount of literature examines the impact of expectations on economic behavior at both the micro and macro level. In the area of individual financial security, research taking into account the difference between rational expectations and actual behavioral expectations regarding asset returns, inflation, savings, and spending has contributed to better understanding and improved program design. In contrast, relatively little attention has been paid to workers’ expectations of their future Social Security benefits. Because Social Security benefits are an important source of retirement income for most workers in many countries, future Social Security benefit expectations presumably play an important role in their consumption, saving, labor supply, and portfolio investment decisions. This article surveys the literature relating to these expectations and presents evidence of workers’ expectations of future Social Security benefits in Canada, Ireland, and the United States. In all three countries, with differing systems of financing and differing politics concerning the programs, surveys find a surprising degree of pessimism and lack of trust in Social Security programs. Although rhetoric in the United States about Social Security being “broken” may be part of the explanation there, such rhetoric is not present in Canada and Ireland.