Debt relief 'helps poor avoid bad decisions'

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.
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.PHOTO: ST FILE

It cuts anxiety and boosts focus, but they may be less risk averse in short term too: Study

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.

  • 76% Households that said they felt anxiety before debt relief

    49% Still felt anxiety three months after debts were repaid

    47% Respondents who were more risk-seeking after debt relief

"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.

A version of this article appeared in the print edition of The Straits Times on April 22, 2016, with the headline 'Debt relief 'helps poor avoid bad decisions''. Print Edition | Subscribe