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Researchers : Borrowing from Yourself: The Determinants of 401(k) Loan Patterns
Complete Description:This paper explores the determinants of people’s decisions to take 401(k) loans. We argue that 401(k) plans do not simply represent retirement saving, but they also provide a means of saving for precautionary purposes. We model factors that rationally would induce people to borrow from their pension plans, and we explain why people do not often use 401(k) loans to replace their more expensive credit card debt. Next we test our hypotheses using a rich dataset and show that people who are liquidity-constrained are more likely to have plan loans, while the better-off take larger loans when they do borrow. Plan characteristics such as the number of loans allowed also influence borrowing and loan size in interesting ways, while loan interest rates have only a small impact.
Date Published:Wednesday, September 1, 2010
Author:Olivia S. Mitchell and Timothy Jun Lu
Funding Agency: Social Security Administration
Type: Working paper;
Source: Administrative data;
Language: English
Audience: Researcher