June 26, 2018

On July 1 1955, the Central Provident Fund (CPF) was introduced as a compulsory savings plan for Singaporeans and permanent residents to fund retirement, healthcare, and housing needs. Individuals are given the flexibility to withdraw 10-30% of their CPF savings when they turn 55.

Visiting Professor Sumit Agarwal of NUS Business School, Associate Professor Jessica Pan of the Economics Department, and Associate Professor Wenlan Qian of NUS Business School studied the financial behaviour of individuals. Their goal was to determine how the entitlement to withdraw a part of their CPF savings at 55 affects consumers’ consumption and saving decisions.

Although such flexibility provides low-income consumers with higher liquidity (more spendable income) to buffer them against financial hardships, it increases present consumption spending at the cost of future retirement security. Agarwal and his co-authors assert that low-income consumers appear to have much larger spending responses relative to high-income consumers. These findings provide evidence of overspending among low-income consumers. In contrast, high-income consumers tend to spread their consumption spending uniformly over their lifetime, a behaviour termed consumption smoothing. The authors point out that puzzlingly, both high and low income consumers appear willing to forgo a higher interest rate in their savings account by keeping a sizeable portion of their savings in low-interest paying bank accounts. This study thus reveals the financial choices an individual makes over the lifecycle.

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