Early pension withdrawal as stimulus

February 2023

Steven Hamilton (George Washington University)
Geoffrey Liu (Harvard University)
Tristram Sainsbury (Australian National University)

IIEP working paper 2023-02

Abstract: During the COVID-19 pandemic, the Australian government allowed eligible individuals to withdraw up to A$20,000 (around half median annual wage income) across two tranches from their retirement accounts, ordinarily inaccessible until retirement. Based on historical returns, the modal withdrawal by the modal-aged withdrawer can be expected to reduce their balance at retirement by more than $120,000 in today’s dollars. One in six working-age people withdrew a total of $38 billion (on average, 51% of their balances). These transfers represented a liquidity shock and were much larger than those considered in the literature to date. Using administrative and weekly bank transactions data, we find a high marginal propensity to spend (MPX) given the size of the transfers of at least 0.43 within eight weeks, spread broadly across categories (including around half or more on non-durables) and across withdrawers. The response to the second withdrawal, which two-thirds returned for and which occurred after activity had recovered, was even larger at 0.48. Withdrawal and spending are predicted strongly by numerous measures of poor financial health, high pre-withdrawal rates of cash withdrawal and gambling, and younger age. The MPX of rational, forward-looking but liquidity constrained consumers can be expected to asymptote to zero as the transfer size rises, while that of present-biased consumers can be expected to remain high. Our findings overwhelmingly are consistent with the latter, suggesting roughly 80% of withdrawers were present-biased. In selecting strongly on the present-biased, the program presents a sharp trade-off between effective macroeconomic stimulus and suboptimal retirement saving policy.

JEL Codes: E21, E63, E71, H31, H55, J32

Key Words: Stimulus, retirement saving, marginal propensity to consume, present bias

A tale of two wage subsidies: The American and Australian fiscal responses to COVID-19

July 2020

Steven Hamilton (George Washington University)

IIEP working paper 2020-12

Abstract: Australia suppressed the virus with swift and strong public health measures including stringent border controls. As of July 2020, the virus continues to spread uncontrolled across the US, resulting in the most recorded cases and deaths of any country. Both countries instituted widespread lock-downs and similarly generous fiscal support, yet Australia has experienced a far milder recession, highlighting the critical role of public health measures in protecting the economy. The role of broad cash stimulus necessarily has been more limited than in an ordinary recession, justifying the use of wage subsidies that encourage businesses to retain workers. The Australian wage subsidy, delivered via the tax authority, was better targeted, more generous, more accessible, but slower to deliver liquidity than the American wage subsidy delivered via private banks. The experience highlights the critical need for significant investments in IRS infrastructure to better prepare for future crises.

 

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