What explains early withdrawals from retirement accounts? Evidence from a panel of taxpayers

We use data from a ten-year panel of individual tax returns to investigate the circumstances under which households choose to incur a 10 percent penalty in order to gain early access to retirement accounts. We attempt to link the likelihood of early withdrawals to shocks experienced by households at the time of withdrawal and to the availability of non-retirement assets. Our findings indicate that penalized withdrawals are significantly more likely among households that experience adverse shocks, and that the effect of shocks is amplified for households with low levels of non-retirement financial wealth. In particular, we find that job loss, income shocks, divorce, and home purchases increase the likelihood of early ESP withdrawals by an average of 3 to 10 points each, with significantly stronger increases among the poorest households. We conclude that a significant portion of early withdrawals from retirement accounts reflects consumption-smoothing behavior by liquidity-constrained households who experience financial shocks, rather than squandering of pension assets.