NCPA - National Center for Policy Analysis

Liquidity in Retirement Savings Systems

July 15, 2015

Liquid retirement savings (meaning those that can be easily accessed when needed) are desirable because liquidity enables individuals to access emergency cash before retirement.  On the other hand, pre-retirement liquidity is undesirable when it leads to under-saving arising from, for example, planning mistakes or self-control problems.

After examining six developed countries, faculty researchers at Harvard find that all of them, with the sole exception of the United States, have made their defined contribution savings accounts overwhelmingly illiquid before age 55:

  • Germany, Singapore, and the United Kingdom have banned early withdrawals, with only disabled or terminally ill people able to make withdrawals. 
  • Canada and Australia generally do not allow withdrawal unless an individual experiences loss of employment.
  • Ontario is different than the rest of Canada in that it allows withdrawals in cases where income falls below a threshold in the previous period.
  • Australia does not allow withdrawal unless the household is long term unemployed and receiving government support for 26 weeks.
  • The United States allows withdrawal at all levels of income and in almost all situations at a maximum tax penalty of 10 percent, plus applicable federal taxes.

The researchers hypothesize that the differences between the U.S. and elsewhere may be due to several factors:

  • A preference for economic freedom as an ends in itself.
  • The private retirement system may only be a supplement to another larger government run retirement system.
  • Self-control differences and the benefits of flexibility in response to economic disaster.

The liquidity variations do not appear to result from differences in safety net programs.

Source:  John Beshears et al., "Liquidity in Retirement Savings Systems: An International Comparison," Harvard Kennedy School, May 2015.


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