Perceptions of economic vulnerability: First evidence from the survey of economic expectations

This report uses data from the authors' National Survey of Economic Expectations to describe how, during 1994, working Americans with health insurance perceived the risk of near-term deterioration in their economic status. Perceived economic vulnerability is measured through responses to questions eliciting subjective probabilities of loss of health insurance, of burglary, and of job loss. We find that respondents tend to rank burglary as the most likely of the three events, followed by job loss, and then loss of health insurance. The perceived risk of crime victimization is much higher than the realized rate of victimization. Male and female respondents have similar risk perceptions but blacks have much greater perceived vulnerability than do whites.

Retirement Savings Portfolio Management

We assess the welfare implications of alternative retirement plan investment options given that households may not invest according to optimal portfolio choice theory but may instead use simple decision rules. We simulate the performance of lifestyle, lifecycle, and other simple strategies for allocating retirement savings. We find that if investors use simple rules of thumb to choose investments, then the impact of these strategies on welfare depend to a large extent on the choice set they are offered. If larger choice sets cause them to undertake more risk, then risk tolerant individuals may tend to be made better off. If larger choice sets cause them to reduce suboptimally low levels of portfolio risk, then the increased choice set may make them substantially worse off. The welfare effects of plan designs that induce lifecycle investing, which tends to be conservative over the lifetime, therefore depend crucially on the counterfactual portfolio composition, as well as preferences and non-retirement wealth.

Measuring and Interpreting Expectations of Equity Returns

We analyze probabilistic expectations of equity returns elicited in the Survey of Economic Expectations in 1999 %uF8182001 and in the Michigan Survey of Consumers in 2002 %uF8182004. Our empirical findings suggest that individuals use interpersonally variable but intrapersonally stable processes to form their expectations. We therefore propose to think of the population as a mixture of expectations types, each forming expectations in a stable but different way. We use our expectations data to learn about the prevalence of several specific types suggested by research in conventional and behavioral finance, but conclude that these types do not adequately explain the diverse expectations held by the population.

Perceptions of Economic Insecurity: Evidence from the Survey of Economic Expectations

We have recently initiated the Survey of Economic Expectations (SEE) to learn how Americans perceive their near-term futures. This paper uses SEE data on over two thousand labor force participants interviewed in 1994 and 1995 to describe how Americans in the labor force perceive the risk of near-term economic misfortune. We measure economic insecurity through responses to questions eliciting subjective probabilities of three events in the year ahead: absence of health insurance, victimization by burglary, and job loss. With item response rates exceeding 98 percent, respondents clearly are willing to answer the expectations questions and they appear to do so in a meaningful way. Using the responses to classify individuals as relatively secure, relatively insecure, and highly insecure, we find that respondents with a high risk of one adverse outcome tend also to perceive high risks of the other outcomes. Economic insecurity tends to decline with age and with schooling. Black respondents perceive much greater insecurity than do whites, especially among males. Within the period 1994-1995, we find some time-series variation in insecurity but no clear trends. We find that expectations and realizations of health insurance coverage and of jobs tend to match up quite closely, but respondents substantially overpredict the risk of burglary.

Eliciting student expectations of the returns to schooling

We report here on the design and first application of an interactive computer-administered personal interview (CAPI) survey eliciting from high school students and college undergraduates their expectations of the income they would earn if they were to complete different levels of schooling. We also elicit respondents' beliefs about current earnings distributions. Whereas a scattering of earlier studies have elicited point expectations of earnings unconditional on future schooling, we elicit subjective earnings distributions under alternative scenarios for future earnings. We find that respondents, even ones as young as high school juniors, are willing and able to respond meaningfully to questions eliciting their earnings expectations in probabilistic form. Respondents vary considerably in their earnings expectations, but there is a common belief that the returns to a college education are positive and that earnings rise between ages 30 and 40. There is a common belief that one's own future earnings are rather uncertain. Moreover, respondents tend to overestimate the current degree of earnings inequality in American society.

Using expectations data to study subjective income expectations

We have collected data on the one-year-ahead income expectations of members of American households in our Survey of Economic Expectations (SEE), a module of a national continuous telephone survey conducted at the University of Wisconsin. The income-expectations questions take this form: "What do you think is the percent chance (or what are the chances out of 100) that your total household income, before taxes, will be less than Y over the next 12 months?" We use the responses to a sequence of such questions posed for different income thresholds Y to estimate each respondent's subjective probability distribution for next year's household income. We use the estimates to study the cross- sectional variation in income expectations one year into the future.

Perceptions of Economic Insecurity: Evidence from the Survey of Economic Expectations

We have recently initiated the Survey of Economic Expectations (SEE) in an effort to learn how Americans perceive their near-term futures. This paper use SEE data on over two thousand labor force participants interviewed in 1994 and 1995 to describe how Americans in the labor force perceive the risk of near-term economic misfortune. We measure economic insecurity through responses to questions eliciting subjective probabilities of three events in the year ahead: absence of health insurance, victimization by burglary, and job loss. With item response rates exceeding 98 percent, respondents clearly are willing to answer the expectations questions and they appear to do so in a meaningful way. Using the responses to classify individuals as relatively secure, relatively insecure, and highly insecure, we find that respondents with a high risk of one adverse outcome tend also to perceive high risks of the other outcomes. Economic insecurity tends to decline with age and with schooling. Black respondents perceive much greater insecurity than do whites, especially among males. Within the period 1994-1995, we find some time-series variation in insecurity but no clear trends. We find that expectations and realizations of health insurance coverage and of job loss tend to match up quite closely, but respondents substantially overpredict the risk of burglary.

How Should We Measure Consumer Confidence (Sentiment)? Evidence from the Michigan Survey of Consumers

The Michigan Index of Consumer Sentiment (ICS) and other indices of consumer confidence are prominent in public discourse on the economy but have little presence in modern economic research. The sparsity of modern research follows an earlier period when economists scrutinized in some depth the methods and data used to produce consumer confidence indices. The literature to date has focused on the predictive power of the survey data used to form the indices; there has been very little study of their micro foundations. This paper analyzes the responses to eight expectations questions that have appeared on the Michigan Survey of Consumers in the period June 2002 through May 2003. Four questions elicit micro and macroeconomic expectations in the traditional qualitative manner; two are components of the ICS. Four questions use a percent chance' format to elicit subjective probabilities of micro and macroeconomic events; versions of these questions have previously appeared in the Survey of Economic Expectations.

Using Expectations Data to Study Subjective Income Expectations

We have collected data on the one-year-ahead income expectations of members of American households in our Survey of Economic Expectations (SEE), a module of a national continuous telephone survey conducted at the University of Wisconsin. The income- expectations questions take this form: "What do you think is the percent chance (or what are the chances out of 100) that your total household income, before taxes, will be less than Y over the next 12 months?" We use the responses to a sequence of such questions posed for different income thresholds Y to estimate each respondent's subjective probability distribution for next year's household income. We use the estimates to study the cross-sectional variation in income expectations one year into the future.

Future Beneficiary Expectations of the Returns to Delayed Social Security Benefit Claiming and Choice Behavior

We report on our preliminary findings from an innovative module of survey questions in the RAND American Life Panel designed to measure willingness to delay take-up of Social Security benefits. Among respondents who expect to stop working full time prior to turning age 62, over 60 percent report that they expect to start claiming Social Security benefits after they turn 63--that is, they expect to delay claiming. In contrast, among those who expect to stop full-time work sometime from age 62 to age 70, only about onequarter expect to delay claiming beyond the retirement age. Another main finding arises from reported probabilities of delayed claiming in hypothetical choice scenarios. These probabilities tend to be quite high relative to previous findings on delayed claiming outcomes. This result is particularly striking for those who are presented with information about the so-called "break-even age" for delayed claiming rather than information about the total amount of benefits that must be foregone during the one year delay.