Friday, March 29, 2019

Debt-relief can help poor make better decisions: Study



26 MARCH, 2019

SINGAPORE — A group of academics has called for a debt-relief programme to be made available to the less well-off here, after a comprehensive study showed that debt takes a huge toll on their ability to make good decisions.

Participants of a first-of-its-kind study by the Social Service Research Centre (SSR) at the National University of Singapore (NUS) viewed each debt as a separate “mental account”, according to the study released on Tuesday (March 26).

Being in the red in many debt accounts was “psychologically painful”, said the study’s authors, who are researchers from the NUS and the Singapore University of Social Sciences (SUSS). Thinking about their debts also increased their anxiety and worsened cognitive performance.

“This psychological impact may prevent the poor from making the right decisions to get out of poverty, further contributing to the poverty trap,” said the study. Its findings were published in the Proceedings of the National Academy of Sciences of the United States of America scientific journal.

A field study conducted between January 2015 and August 2017 involved 196 chronically indebted low-income individuals who benefitted from the Getting Out of Debt (GOOD) programme managed by Singapore-based charity Methodist Welfare Services.

The participants were part of a one-off debt relief programme for households with a monthly per capita income of less than S$1,500 and had outstanding chronic debts owed for at least six months. These debts included included mortgage or rental, utilities, town council taxes, telco bills and hire purchase bills.

A comprehensive survey was conducted before and three months after the participants received the debt relief.


The charity provided debt relief of up to S$5,000, roughly equivalent to three months’ worth of household income. Before debt relief, the average monthly household income per capita of the participants was S$364.

Participants received an average debt relief of S$2,548, with 25 per cent receiving the maximum amount of S$5,000.

Three months after receiving debt relief, the average debts for the households fell from S$6,257 to S$4,265, while median debts fell from S$3,574 to S$1,128 and 90 per cent of participants reported holding less debt. The average number of debt accounts fell from 3.27 to 2.21.

The study also found that relieving chronic debt reduced participants’ anxiety, with the proportion of participants exhibiting signs of anxiety falling from 78 to 58 per cent after they received debt relief.

“These improvements are consistent with observational studies linking indebtedness to poor psychological health,” said the study.

Cognitive functioning also significantly improved after debt relief, with the average error rate dipping from 17 per cent to four per cent. The error rate was derived from a series of tests designed by the researchers to measure cognitive functioning.

Median reaction time also improved from 1.86 to 1.27 seconds.

The amount of debt relief had no effect on participants’ anxiety and decision making as long as they were able to clear some of their debts, said the study.


Associate Professor Irene Ng from the NUS Faculty of Arts and Social Sciences said the study presented a “pragmatic case” for designing good debt relief programmes for low-income households.

“Not helping low-income households with debt is counter productive because not doing so leaves them in suboptimal functioning and high anxiety,” she said.

The design of the intervention is key and should focus on “decreasing the mental load on low-income households, whose minds are already highly stressed”, she added.

The researchers suggested policy intervention to streamline debts as they said restructuring or consolidating debt could be more sustainable as “it is less costly and more effective than simply clearing debt”.

“Poverty alleviation interventions should target and reduce the factors that contribute to the mental burdens of the poor,” said the researchers.

They are now examining the longer term effects of debt relief and are applying the insights from the study to find innovative solutions that may help the poor.

However, Dr Ong Qiyan, who is also from the NUS Faculty of Arts and Social Sciences, pointed out that a challenge faced by poverty alleviation policies was the “bedrock belief” by the public that the poor were in debt because of personal failings such as a lack of motivation and talent, which “most of the Singapore population possess and value”.

The study showed that debt impairs psychological functioning and decision-making and “it would be extremely challenging for even the motivated and talented to escape poverty”, added Dr Ong.

“The poor must either have exceptional qualities or be exceptionally lucky to get out of poverty. It is hard being poor, harder than we think.”

[See also this Youtube Video on Scarcity: Why having too little mean so much.

Google "Psychology of Poverty"; Eldar Shafir, and Sendhil Mullainathan and Rutger Bregman.]

No comments: