Debt relief 'helps poor avoid bad decisions'

It cuts anxiety and boosts focus, but they may be less risk averse in short term too: Study
By Priscilla Goy and Janice Tai, The Straits Times, 22 Apr 2016

Clearing the debts of the poor reduces their anxiety and helps them focus better, possibly reducing the chances that they will make bad decisions which keep them mired in poverty.

This was a key finding of the first local study on how debt affects the poor, which was presented at a conference yesterday.

But before help groups rush to offer debt-relief schemes, researchers were quick to warn that their findings also showed giving the poor a fresh start made them less risk averse in the short term.

This suggests that they may do things such as buy lottery tickets, and inadvertently slip back into more debt.

This key study is believed to be the first local survey that establishes debt as a cause of poverty rather than just a consequence.

Research overseas has shown that poverty taxes the brain to such an extent that the poor are susceptible to making bad decisions.

"Many low-income households in Singapore have chronic debt burdens and consistently struggle to make required payments on time and in full.

"However, little is known about how debt affects them," said Dr Walter Theseira, a senior lecturer at SIM University who was one of the researchers involved in the study.

Low-income households with chronic debt were polled, including 246 beneficiaries of the Methodist Welfare Services' one-off debt relief scheme last year.

Called the Getting Out Of Debt programme, it aimed to offer a fresh start to more than 600 families struggling with debt, and helped to ease their burden by between $2,000 and $5,000 each.

The survey looked at the effects of debt relief, three months after debts were repaid.

Before receiving debt relief, 76 per cent of the 246 beneficiaries surveyed showed symptoms of anxiety. This figure was reduced to 49 per cent, three months after debts were repaid.

Close to three-quarters of the respondents also scored better in a test on cognitive functioning, after their debts were repaid.

But it seems that being relieved of debt does not mean people are more cautious in their financial decisions - 47 per cent of those surveyed were found to be more risk-seeking after debt relief.

"It could be that they're more optimistic in the short term. Their debts are cleared, they want to improve their situation, so they go for riskier options with short-term gains," said Dr Ong Qiyan, another of the study's researchers.

Some of them could go on to buy lottery tickets, or try for odd jobs which do not offer Central Provident Fund contributions, thus having short-term gains but not sustained job security, she added.

More research has to be done to see if debt relief does more good than harm, added Dr Ong, a research fellow at the National University of Singapore (NUS) Social Service Research (SSR) Centre.

The findings were presented to more than 300 people at the SSR Centre Conference at NUS.

Emeritus Senior Minister Goh Chok Tong, adviser to the SSR centre, called for the social service sector to step in to plug gaps left by the Government.

Mr Goh also urged the sector to alert the Government to blind spots and help ensure that current programmes serve people effectively.

Easing impact of poverty
By Janice Tai, The Straits Times, 23 Apr 2016

Debt is traditionally seen as a consequence of poverty rather than a cause of it.

In 2013, a new school of research overseas contributed to a paradigm shift in how the poor are viewed by suggesting that the state of scarcity taxes the brain to such an extent that they have little "mental bandwidth" left to deal with decisions.

In such cases, people tend to make bad choices that may further lock them in the cycle of poverty.

Findings from a new study here, led by the National University of Singapore, have confirmed this to be true for the urban poor in a city like Singapore, compared to the examples of extreme scarcity in developing countries examined by the poverty scholars in the earlier research.

The Singapore study has also taken the discussion a crucial step further. It shows that the longer-haul cognitive impact of poverty on the poor can be reversed or alleviated.

Academics here surveyed 246 low-income households with chronic debt just before and three months after their debts were repaid as part of a one-off debt-relief charity project.

They found that the effects of clearing the debts of the poor - reducing anxiety levels and improving cognitive functioning - last even three months down the road when test results were taken.

Comparatively, the 2013 research done by Harvard economist Sendhil Mullainathan and Princeton psychologist Eldar Shafirlooked at the impact of scarcity at a particular point in time.

The latest findings here have huge implications, especially for families mired in poverty for years.

It means that such scarcity may not leave a permanent cognitive mark on the debtors and their children and suggests the potential for debt-relief programmes in reversing the insidious impact of lack on the brain.

More research is needed to see if the impact of scarcity - be it money, time or even affection - can still be eased one, five or 10 years down the road. In the meantime, this promising study gives hope to many needy families in debt.