Do consumers respond to future income shocks? Evidence from social security reform in Taiwan

A prediction of the basic permanent income hypothesis/life cycle model is that an unexpected increase in future income produces an immediate increase in current consumption. This paper tests that prediction using data from Taiwan. The 1985 Labor Standards Law granted all employees in covered industries a windfall retirement/severance benefit. My results indicate that consumption did not increase immediately for those who were granted the windfall, relative to those who received no windfall. Moreover, consumption for those receiving a greater windfall did not increase relative to those who were granted less.