Subjective Expectations, Social Security Benefits, and the Optimal Path to Retirement

Published: 2019


Americans face the challenges of retirement with varying degrees of preparation. Evidence indicates that that many individuals may not be making the best possible choices with respect to their Social Security and retirement savings. We assess the subjective expectations of non-retirees and find that they have sizable biases and uncertainty about future retirement benefits. This uncertainty and the level of subjective expectations can affect workers’ wealth accumulation and retirement readiness. We build on these observations and combine unique survey data with a life-cycle optimization model to measure the role of Social Security literacy, subjective expectations about retirement benefits, and behavioral traits as determinants of life-cycle savings decisions and welfare. The goal of this project is to better understand the role of retirement expectations as determinants of savings decisions and retirement income. We forecast future benefits and measure the bias in expectations. We find heterogeneity in the direction of the expectation bias: Men and those with low levels of uncertainty about retirement benefits are less likely to overestimate their future retirement benefits, hence are more likely to save more and reach retirement better prepared. We find that these biases in subjective expectations translate into suboptimal asset accumulation and welfare losses.

Key Findings

    • Most retirees find that the amount of Social Security retirement benefits they receive is lower than what they had expected before claiming.
    • Using unique survey data, we find that most individuals face significant uncertainty about the amount of Social Security retirement benefits they will receive after retirement and that they tend to overestimate these amounts.
    • The past experience of current retirees’ forecast errors about benefit amounts is consistent with our estimates of biased expectations from current workers, indicating that the problem of inaccurate expectations about retirement benefits is a persistent one.
    • Not appropriately adjusting for early or delayed claiming could contribute to expectation biases about retirement benefits. In particular, this would be most relevant for those with lower levels of education.
    • Current workers recognize that they do not have a good idea of what their future retirement benefits will be. Forty-nine percent of our survey respondents declare having no knowledge about their benefit amount.
    • The average expectation bias for monthly retirement benefits in our sample is $307, which equals 27% of the average forecasted benefit for this sample (in current dollars).
    • The level of uncertainty about retirement benefits decreases with age, and the size of the expectation bias, as well as the probability of overestimating retirement benefits, decline as the individual approaches his claiming age. Therefore, expectations about benefits become more precise as individuals approach retirement.
    • Men display lower expectation bias and are less likely to overestimate their retirement benefits.
    • Having more uncertainty about future retirement benefits is positively associated with a higher expectation bias and is associated to an increased probability of overestimating future benefits.
    • Those who claim to have no knowledge of their future benefits show much lower expectation bias. They are more likely to err on the conservative side and underestimate their future benefits.
    • Personal attitudes about finances, such as levels of financial literacy and propensity to plan for retirement, are correlated with retirement benefits expectation bias but not with the probability to overestimate retirement benefits.
    • A life-cycle model calibrated to our survey data indicates welfare losses due to lack of knowledge about future retirement benefits. Moreover, inaccurate expectations about future labor earnings further contribute to the welfare loss.
    • The model indicates that when individuals make consumption and savings choices based on their subjective expectations about future retirement benefits, this results in too much consumption during the working years, too little asset accumulation, and, therefore, too little consumption in retirement on average with respect to what would be optimal for them. These discrepancies between the optimal behaviors and the ones under subjective expectations imply a 1% welfare loss from lack of accurate knowledge about the amounts of Social Security retirement benefits to be expected.
    • We consider the implications of behaving according to subjective expectations about labor earnings as well as about retirement benefits. In this case, the discrepancy between the subjective expectations life-cycle patterns and the rational expectations ones results in lower asset accumulation and a welfare loss of 3.5%


Prados, María J., and Arie Kapteyn. 2019. “Subjective Expectations, Social Security Benefits, and the Optimal Path to Retirement.” Ann Arbor, MI. University of Michigan Retirement and Disability Research Center (MRDRC) Working Paper; MRDRC WP 2019-405.