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An Investigation on Early Voluntary Withdrawals from Individual Retirement Accounts: An Empirical Study on an Emerging Market

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Abstract

Early withdrawals from individual retirement accounts are one of the main problems of pension companies in both developed and emerging countries. The aim of this study is to identify the potential reasons behind decisions to withdraw early from the individual retirement system in Turkey. Using Cox proportional hazards model, we find that there is a significant negative relationship between financial literacy and withdrawal probability. Our results reveal that men and younger individuals are more likely to make an early withdrawal. We also find that individuals who experience liquidity constraints and income shocks tend to withdraw their contracts earlier. Further analysis suggests that the effect of variables remarkably changes among different subgroups. We believe that our findings will assist both pension managers and policymakers to design better retirement plans and to take steps to prevent voluntary withdrawals in the long term.

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Notes

  1. See Lannoo et al. (2014).

  2. Carrol and Weil (1994).

  3. Attanasio et al. (2000).

  4. Jackson and Nakashima (2015).

  5. See the Individual Pension System Progress Report of Turkey Individual Pension System Progress Report of Turkey (2014) at http://www.egm.org.tr/bes2013gr/bes2013gr_en.pdf.

  6. IRA participants gain the full retirement rights when they are 56 years old and have stayed in the system for at least 10 years. Otherwise they will forego the benefits related with the government match and lower tax rates applied to the amount accumulated.

  7. See U.S. Department of Treasury, Internal Revenue Service (2016).

  8. See Government of Canada (2016) at http://www.esdc.gc.ca/en/reports/pension/changes.page accessed on February, 2016.

  9. Boradbent +et al. (2006).

  10. Butrica et al. (2010).

  11. Engström and Westerberg (2003).

  12. Smith (2006).

  13. In DB plans, the pension is a function of years worked and wages earned and is financed on a pay-as-you-go basis.

  14. The gross domestic savings-to-GDP ratio is 15.8 per cent for Turkey, compared to 29.5 per cent in Hungary, 21.6 per cent in Poland and 19.8 per cent in Argentina as of 2014.

  15. Pension companies have the right to cancel if the customer does not make any contribution for 60 months after the contract date.

  16. Guariglia and Markose (2000).

  17. Munnell et al. (2001).

  18. Smith et al. (2004).

  19. Celiktopuz and Kayam (2013).

  20. De Giovanni (2010); Kim (2005); Kolkiewicz and Tan (2006); Kuo et al. (2003); Outreville (1993); Renshaw and Haberman (1986).

  21. The data were retrieved from the OECD website following the link: data.oecd.org.

  22. Elveren and Hsu (2007).

  23. Elveren (2008).

  24. Financial Services Authority (2006).

  25. Wilmoth and Koso (2002).

  26. Boraas and Rodgers (2003).

  27. Ando and Modigliani (1963).

  28. Mandell (2004).

  29. Hogarth and Hilgert (2002).

  30. Choi et al. (2002).

  31. Madrian and Shea (2001).

  32. Lusardi and Mitchell (2011).

  33. Linton (1932); Russell et al. (2013).

  34. Bayer et al. (2009).

  35. We do not have full access to the information of all individual retirement system participants. Therefore, it is only a small portion of the whole population. Our data vendor Anadolu Hayat Emeklilik provided us the final clustered sample, which consists of more than ten thousands of contracts and contract holders in different spreadsheets. We then combined all the information about the contracts and participants to obtain a single data set, which includes 5972 contracts without any missing data.

  36. Approximately 87 per cent of the individual retirement system participants make monthly payments.

  37. Customers can change the weights of the funds in their portfolio every month.

  38. We have access to the information about the participants’ declared contribution amount for each month.

  39. Is Bankasi (2014).

  40. Cox (1972).

  41. Smith (2001).

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Acknowledgements

We would like to thank Anadolu Hayat Emeklilik Pension Coporation for providing us the data used in this study. The authors are grateful to the editor and two anonymous referees for their comments and suggestions that helped us to improve the paper. Any remaining errors are our own.

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Authors and Affiliations

  1. Department of Business Administration, Hacettepe University, Beytepe, Çankaya, 06800, Ankara, Turkey

    Yilmaz Yildiz & Mehmet Baha Karan

  2. The Scientific and Technological Research Council of Turkey, Akay Cad., No. 6, Bakanliklar, Çankaya, 06420, Ankara, Turkey

    Seyma Bayrak Salantur

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  1. Yilmaz Yildiz
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  2. Mehmet Baha Karan
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  3. Seyma Bayrak Salantur
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Correspondence to Yilmaz Yildiz.

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Yildiz, Y., Karan, M.B. & Bayrak Salantur, S. An Investigation on Early Voluntary Withdrawals from Individual Retirement Accounts: An Empirical Study on an Emerging Market. Geneva Pap Risk Insur Issues Pract 42, 732–756 (2017). https://doi.org/10.1057/s41288-016-0037-9

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