Publication Date

1-1-2007

Award Type

Honorable Mention

Dissertation Advisor

Orley Ashenfelter

Abstract

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

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