Age of Decision: Pension Savings Withdrawal and Consumption and Debt Response

Abstract

This paper exploits an administrative regulation in Singapore that allows individuals to withdraw between 10 to 30 percent of their pension savings at age 55. We find a large and highly significant increase in individuals’ bank account balances within the first month of turning 55, which declines by about a third by the end of twelve months. Consumers use the increase in disposable income to pay down credit card debt. Liquidity constrained individuals are significantly more likely to increase their spending upon turning 55 than unconstrained individuals – nonetheless, the spending response of constrained individuals is concentrated on non-durable and non-visible goods, rather than visible goods. We also provide evidence that withdrawal behavior is responsive to the prices of durable goods such as cars. Consumers appear willing to forego much higher interest rates in their retirement accounts by leaving a sizeable portion of their withdrawn savings in a low-interest accruing bank account for at least a year after withdrawal. We show that, for some consumers, part of this behavior may be due to the desire to invest in the property market when housing returns are high.

Keywords: Aging, Pension Savings, Consumption, Spending, Debt, Credit Cards, Household Finance, Banks, Loans, Durable Goods, Discretionary Spending, Liquidity Constraints, Credit Constraints

JEL Classification: D12, D14, D91, E21, E51, E62, G21, H31, J26