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Henrik Yde Andersen ESSAYS on DEBT and PENSIONS Essays on Debt and Pensions Yde Andersen, Henrik Document Version Final published version Publication date: 2018 License CC BY-NC-ND Citation for published version (APA): Yde Andersen, H. (2018). Essays on Debt and Pensions. Copenhagen Business School [Phd]. PhD series No. 18.2018 Link to publication in CBS Research Portal General rights Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights. Take down policy If you believe that this document breaches copyright please contact us ([email protected]) providing details, and we will remove access to the work immediately and investigate your claim. Download date: 30. Sep. 2021 COPENHAGEN BUSINESS SCHOOL ON DEBT AND PENSIONS ESSAYS SOLBJERG PLADS 3 DK-2000 FREDERIKSBERG DANMARK WWW.CBS.DK ISSN 0906-6934 Print ISBN: 978-87-93579-82-8 Online ISBN: 978-87-93579-83-5 Henrik Yde Andersen ESSAYS ON DEBT AND PENSIONS Doctoral School of Economics and Management PhD Series 18.2018 PhD Series 18-2018 Essays on Debt and Pensions Henrik Yde Andersen Supervisor: Svend Erik Hougaard Jensen PhD School in Economics and Management Copenhagen Business School Henrik Yde Andersen Essays on Debt and Pensions 1st edition 2018 PhD Series 18.2018 © Henrik Yde Andersen ISSN 0906-6934 Print ISBN: 978-87-93579-82-8 Online ISBN: 978-87-93579-83-5 The PhD School in Economics and Management is an active national and international research environment at CBS for research degree students who deal with economics and management at business, industry and country level in a theoretical and empirical manner. All rights reserved. No parts of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage or retrieval system, without permission in writing from the publisher. Preface This dissertation is the result of my doctoral studies at the Department of Economics, Copenhagen Business School. I express my gratitude to Danmarks Nationalbank for funding, and I thank both institutions for providing excellent research environments. There are many people I wish to thank. First, my supervisors, Svend Erik Hougaard Jensen, Søren Leth-Petersen and Torben M. Andersen, for being huge inspirations and taking their time to guide me through the world of academia. My wholehearted thanks to Søren for encouraging me to pursue a PhD and inviting me to work on a joint paper, which constitutes the second chapter in this dissertation. Working closely with you and your contagious curiosity have been truly rewarding. Thanks to Svend for giving me the opportunity to be part of PeRCent and for always being enthusiastic about my research. My best interests were always in safe hands with you. Thanks to Torben for our talks about connecting the dots between theory and empirics and for outstanding guidance along the way. I wish to thank my colleagues at Danmarks Nationalbank for helpful discussions about my work; in particular, members of the research unit who invested time and effort in getting me started in 2014. Researchers at the Institute for Fiscal Studies in London also deserve a big thank you for their hospitality during my visit in 2017. Special thanks to Cormac O’dea and Orazio Attanasio for arranging the visit. On that note, I express my appreciation for funding from Oticon Fonden, Otto Mønsteds Fond, Christian og Ottilia Brorsons Rejselegat, GTN Fonden and Tranes Fond. I was privileged enough to shuffle between two workplaces, one at Copenhagen Business School and one at Danmarks Nationalbank. I appreciate all the chats and laughs with fellow PhD students and department members at both institutions. Special thanks to my office mates for being great company throughout the years. I am grateful to the Department of Economics at University of Copenhagen for inviting me for seminars and workshops, especially thanks to Asger Lau Andersen and CEBI/CAM members. My friends and family deserve my deepest appreciation for their encouragements over the past years. In particular my sister and parents who never failed to inspire me to do my best—even before my studies. I am deeply indebted to Nina for her unconditional support and for bearing with my absent-minded presence from time to time. For her genuine interest and challenging questions over the actual importance of my work and finally, for reminding me that there is a lot of other great stuff going on outside economics. Henrik Yde Andersen i Abstract Money is a scarce resource for most people. For that reason, the decision whether to spend more today and less in the future or vice versa is a recurrent question to many of us. Pension systems provide incentives for saving for future consumption and mortgage markets allow us to increase consumption immediately by giving up future spending opportunities accordingly. For this reason, pension and mortgage systems play a key role to individual savings decisions. This dissertation is comprised by three self-contained chapters concerned with how individual savings behavior depends on the design of certain pension and mortgage features. Chapter one, "Do Tax Incentives for Saving in Pension Accounts Cause Debt Accumu- lation?", applies a quasi-experimental research design on a Danish 2010 policy that reduced tax incentives for saving in annuity pension schemes to show significant substitution of sav- ings from retirement accounts to gross debt repayments. We find that for every 1 Danish krone reduction in retirement savings 31 cents goes to debt repayments. Taking into ac- count all types of savings, we find full crowding out. Consistent with previous findings, we document that the effect is driven by a minority, about 23 percent, who actively rebalance their savings. Chapter two, "Housing Wealth Effects and Mortgage Borrowing", examines whether home price changes drive mortgage based equity extraction. To do this we use longitudinal survey data with subjective information about current and expected future house prices to calculate unanticipated house price changes. We link this information at the person level to high quality administrative records with information about mortgage borrowing as well as savings in various financial instruments. We find a marginal propensity to extract out of unanticipated housing wealth gains to be 3-5 percent. We find no adjustment to other components of the portfolio, and we find that mortgage extraction leads to an increase in spending. We find no evidence that the effect is driven by collateral constraints. Instead, the effect is driven by about 11 percent of the observations where the respondent is recorded having actively taken out a new mortgage. Three out of four among these refinance an existing fixed rate mortgage loan and exploit that the old loan can be prepaid and a new loan established to lock in a lower market rate. The propensity to extract equity is higher for the group that has an incentive to refinance following a drop in the market interest rate iii and at the same time experience an unanticipated housing wealth gain. These results point to the existence of a housing wealth effect that is intimately connected to the functioning of the mortgage market, and this suggests that monetary policy plays an important role in transforming unanticipated housing wealth gains into spending by affecting interest rates on mortgage loans. Chapter three, "The Effects of Tax Penalties on Early Withdrawals from Pension Ac- counts", use variation from a natural experiment that is plausibly exogenous to other savings decisions to show that reducing the tax penalty rate by 1 percent increases the propensity to withdraw pension assets early by 0.1 percentage points on average. Access to detailed administrative records allows us to show that the effect is two to three times larger for consumers who are likely to be affected by liquidity constraints and individuals who lose their job or divorce. This is consistent with the idea that consumers finance spending with pension assets only when other less costly ways to access liquidity have been exhausted. Conditional on withdrawing pension assets early the amount withdrawn increases by about 3 percent for each one percent reduction in the tax penalty. Only 1/3 of the withdrawals are rolled over to non-retirement savings accounts or used to repay debt. We find that those who cash out pension wealth in the year of a job loss reduce overall savings rates for at least six years after the withdrawal. Ultimately, our evidence suggests that tax penalties are efficient to increase long-term savings. iv Resumé (in Danish) For de fleste er penge en knap ressource. Derfor er det en tilbagevendende overvejelse for mange, om de ønsker at øge forbruget i dag på bekostning af forbrug i fremtiden – eller omvendt. Pensionssystemer giver forbrugerne et incitament til at spare mere op, mens re- alkreditinstitutter stiller kredit til rådighed, så folk kan øge forbruget med det samme og dermed sænke forbrugsmulighederne i fremtiden. Pensionsselskaberne og realkreditinstitut- terne spiller derfor en central rolle for den enkeltes opsparings- og forbrugsadfærd. Denne afhandling består af tre selvstændige artikler, der handler om, hvordan individual opspa- ringsadfærd påvirkes af særlige elementer i pensionssystemet og markedet for realkreditlån. Kapitel et, "Do Tax Incentives for Saving in Pension Accounts Cause Debt Accumula- tion?", anvender et kvasi-eksperimentielt undersøgelsesdesign på en dansk politikændring i 2010, som reducerede skatteincitamentet ved at spare op i ratepensionskonti. Resultaterne viser en signifikant substitutionseffekt mellem opsparing i pensionskonti og en reduktion af bruttogæld. Vi finder, at for hver 1 dansk krones reduktion i pensionsopsparingen går 31 øre til afdrag på gæld. Når alle opsparingskomponenter medregnes, finder vi fuld fortræng- ning.
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