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The welfare costs of misinformation

Author

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  • Bairoliya, Neha
  • McKiernan, Kathleen

Abstract

Social Security (SS) benefits, with an average replacement rate of around 40 percent, serve as an important source of retirement income for older Americans. Yet, the size of lifetime benefits a household receives depends on many factors, including the age of benefit claim and life-cycle labor supply decisions. Given the complexity of the associated rules, many households may lack understanding of one or more aspects of the system. In this work, we use a life-cycle model of consumption, savings, labor supply, and Social Security application decisions to study the welfare impact of such misinformation. Our findings indicate significant welfare losses stemming from misinformation, especially when it causes individuals to strongly over-estimate the value of future entitlements. Additionally, we show that the Social Security Statement program, a large public information campaign, must inform only 20.1 percent of misinformed individuals in order for aggregate benefits of information to outweigh aggregate costs.

Suggested Citation

  • Bairoliya, Neha & McKiernan, Kathleen, 2024. "The welfare costs of misinformation," Journal of Economic Dynamics and Control, Elsevier, vol. 169(C).
    • Handle: RePEc:eee:dyncon:v:169:y:2024:i:c:s0165188924001519
    DOI: 10.1016/j.jedc.2024.104959
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    More about this item

    Keywords

    Retirement; Social Security; Misinformation; Life-cycle; Retirement consumption puzzle;
    All these keywords.

    JEL classification:

    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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