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

50 Pages Posted: 28 Aug 2014 Last revised: 8 Apr 2016

Sumit Agarwal

Georgetown University - Department of Finance

Jessica Pan

National University of Singapore (NUS)

Wenlan Qian

National University of Singapore - NUS Business School

Date Written: April 7, 2016

Abstract

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appear willing to forego much higher interest rates in their retirement accounts by leaving a sizeable portion of their withdrawn savings sitting in a low-interest accruing bank account for at least a year after withdrawal.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

Agarwal, Sumit and Pan, Jessica and Qian, Wenlan, Age of Decision: Pension Savings Withdrawal and Consumption and Debt Response (April 7, 2016). Available at SSRN: https://ssrn.com/abstract=2487658 or http://dx.doi.org/10.2139/ssrn.2487658

Sumit Agarwal

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Jessica Pan

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Wenlan Qian (Contact Author)

National University of Singapore - NUS Business School ( email )

15 Kent Ridge Drive
Singapore 117592, 119245
Singapore
(65) 65163015 (Phone)

HOME PAGE: http://sites.google.com/site/wenlanqian/

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