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National Research Council (US) Steering Committee on the Challenges of Assessing the Impact of Severe Economic Recession on the Elderly; National Research Council (US) Committee on Population; National Academies (US) Division of Behavioral and Social Sciences and Education. Assessing the Impact of Severe Economic Recession on the Elderly: Summary of a Workshop. Washington (DC): National Academies Press (US); 2011.

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Assessing the Impact of Severe Economic Recession on the Elderly: Summary of a Workshop.

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THE ECONOMIC CRISIS NOW AND IN HISTORICAL PERSPECTIVE

Three workshop presentations provided context for the current situation. In the first presentation, Carmen Reinhart observed that the current economic crisis has affected developed economies, including those of the United States, Europe, and Japan, in a way that has not been seen since World War II. International experience indicates that severe financial crises are protracted affairs and that not all markets recover at an equal pace. Historically, declines in housing and equity prices in the aftermath of a financial crisis have been long-lived, lasting on average for 6 years and 3.4 years, respectively. In addition, Reinhart reported that typically it takes, on average, 4 years for per capita income to recover to precrisis levels, whereas unemployment rates typically continue to increase for a period of nearly 5 years. Financial crises are also usually debt crises: they are typically preceded by surges in private debt, and, in the 3 years following a financial crisis, government debt nearly doubles on average as revenues shrink and fiscal finances deteriorate (Reinhart and Rogoff, 2009).

In the next presentation, Susann Rohwedder presented findings from the RAND American Life Panel (ALP), a nationally representative longitudinal survey that is conducted over the Internet and can collect data with high frequency. High-frequency interviews have the advantage of capturing certain events that are more likely to be missed in low-frequency surveys (e.g., short spells of unemployment, spells without health insurance), and they can also track variation in measures that cannot be easily or reliably elicited by means of recall (e.g., expectations, mood and affect, satisfaction in certain domains). During 2008–2009, ALP surveys were conducted every 3 months in November, February–March, and May. Since then, shorter monthly surveys have supplemented the longer ones conducted every three months.

Rohwedder reported that households surveyed by the ALP were regarded as having experienced “immediate financial distress” if they experienced at least one of the following: being behind on mortgage payments, having negative home equity, having to foreclose on a property, or either the respondent or the spouse being unemployed. A total of 36 percent of households experienced this form of financial distress between November 2008 and April 2010, with younger households and those with lower incomes being more affected.

Losses in retirement savings, predominantly in the stock market, disproportionately affected the older and higher income population. The younger population, however, was more adversely affected by the housing downturn: in April 2010, 15.1 percent of homeowners younger than age 50 had negative home equity, compared with 6.6 percent of those ages 50–64 and 4.0 percent of those ages 65 and older.

Rohwedder indicated that according to data collected between May 2009 and January 2010, the most common way of coping with income loss due to unemployment was through reductions in spending (89 percent of households), followed by reductions in the amount of money put into savings (50 percent of households). The sources that most commonly made up for lost income were unemployment benefits (39 percent of households), money from savings (35 percent of households), financial help from family or friends (28 percent of households), and borrowed money or credit card debt (22 percent of households). Transitioning from employment to unemployment increased the likelihood of dissatisfaction, depressive symptoms, and difficulties in sleeping, while transitioning from unemployment to employment had opposite effects. One important research topic has to do with improving the understanding of the long-term consequences of these events.

The ALP also contains information on people’s expectations about the future. Survey respondents were asked about the subjective probability of a gain in the stock market both a year from now and 10 years from now. From November 2008 through May 2010, there was a modest increase in people’s 1-year expectations of a gain but a decline in their 10-year expectations; 1-year expectations of personal job loss also did not improve over this period. Rohwedder also indicated that households ages 65 and older were consistently less likely than younger households to anticipate declines in spending.

A participant suggested that Hawthorne effects (i.e., effects that result from a person’s being under observation), if present in a high-frequency survey such as the ALP, might mean that persistent questioning could cause people to focus on how miserable they are or to behave differently than they would otherwise. Rohwedder responded that the ALP is careful not to directly mention the financial crisis, and that it situates mood and affect measures at the beginning of the survey rather than after questions about experiences such as job loss. With a larger sample size, it may be possible to gain insight into possible survey effects by randomly assigning some people to be interviewed less frequently.

In his presentation, Matthew Shapiro laid out findings from the Cognitive Economic Study, a survey resource whose sample frame mirrors that of the Health and Retirement Study (HRS) but which has more detailed measures of cognition, wealth, and determinants of financial decision making—such as financial sophistication (e.g., knowledge about portfolio diversification), preferences (e.g., risk tolerance), and expectations. Survey rounds were conducted in 2008 and 2009, and there are plans for additional waves in 2011 and 2013.

Preliminary results suggest that there was no panic or systematic dumping of stock among respondents, according to Shapiro, although it is currently unclear whether this should be attributed to farsightedness or to inertia. Using a measure of processing ability known as “fluid intelligence,” researchers found that people in the highest cognition group had significantly more wealth at baseline than those in the lower cognition groups and also experienced greater losses during the crisis. However, those with higher cognition may have been better positioned to make adjustments, which could help explain the absence of a panic response. Shapiro also noted that even those with no financial wealth were greatly affected by the economic crisis in terms of eating less food (both at and away from home) and reducing their purchases of other nondurables; they also said that they were more likely to delay the purchase of a motor vehicle and delay retirement. The mean expected delay in retirement was 5.9 years for those with less than $10,000 in financial wealth, 4.06 years for those losing less than 10 percent of their wealth, and 3.9 years for those who lost 10 percent or more of their wealth. The relatively large magnitudes of expected delay among those postponing retirement suggest both the severity of the current recession and that economic uncertainty may play an important role.

In the general discussion that followed the presentations, it was noted that most of the subjective probabilities that surveys currently ask about—regarding, for example, work, retirement, and the stock market—were originally developed as part of the HRS in the early 1990s. According to participants, other types of expectations that could be asked about include expectations of indebtedness, higher taxes, lower public benefits, and lower living standards and lack of prosperity; discrepancies between what people say about retirement and their actual retirement behavior; and the permanency of expectations. One participant indicated that being more leveraged may be tied to expectations of higher volatility in the stock market, since small shocks can have large effects when people are highly leveraged. Another observed that Japan, which has had a severe reduction in expectations about growth even though it has not experienced catastrophic crises, may be a pertinent comparison. It was also suggested that it might be useful to adopt a comparative approach to get a sense of whether people think that they are worse off than, for example, Europeans or the Japanese; at the very least, questions could be broadened to include other individuals as points of comparison.

Copyright © 2011, National Academy of Sciences.
Bookshelf ID: NBK56642
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