My 15 year old dog does this too, and has for a few years now. Occasionally she gets really bad with her pillow and will dig away at it and circle until I snap her out of it. The digging and pawing and rooting at a bedding area will drive you nuts after a while.
She also fake buries bones and food. i.e. moving her head through the air and over her food or bones as if there were a pile of dirt there.
She has always done some variation of these behaviors I think, but they have definitely gotten more severe with age (and yeah mine is going a bit senile too I'm pretty sure).
One thing I have noticed is that she does it less so in different beds, which all have adequate cushioning. I guess it is situational for them, and they also forget certain steps in the whole laying down process. Mine does this too if I have to wash one of her beds (she has three scattered around the house), she will not go lay down on the other one but will wander around the area of the missing bed.
Someday I hope to be the kind of person my dog thinks I am