Age of Decision: Pension Savings Withdrawal and Consumption and Debt Response
50 Pages Posted: 28 Aug 2014 Last revised: 8 Apr 2016
Date Written: April 7, 2016
We exploit an administrative regulation in Singapore that allows individuals to withdraw between 10 to 30 percent of their pension savings at age 55 to study how consumers respond to the option to cash out retirement savings. 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. This decrease is larger for low-income and liquidity constrained consumers. Constrained individuals are also significantly more likely to increase their total card spending upon turning 55. The spending response is more modest for unconstrained individuals. Both groups use the increase in disposable income to pay down credit card debt. Back-of-the-envelope calculations suggest that the large consumption response by constrained consumers may indicate some degree of overspending. Puzzlingly, both groups of consumers appear willing to forego much higher interest rates in their retirement accounts by leaving a sizeable portion of their withdrawn savings sitting in a low-interest accruing bank account for at least a year after withdrawal.
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
Suggested Citation: Suggested Citation