Stuff happens. And when the stuff comes in the form of an economic emergency, we all need a way to cushion the financial blow.
Job loss, health emergencies or a fall in income can destabilize households, and having a backup can mean the difference between keeping a roof overhead and facing crushing debt or bankruptcy. Such financial jolts also force workers to make premature withdrawals from retirement accounts, incurring penalties and taxes and hurting their long-range retirement prospects.
There is growing consensus in Washington that the inability of many American families to cope with economic blows is a serious problem that needs fixing. The most efficient, robust solution would be to strengthen our key social insurance programs: Social Security, health insurance and unemployment insurance.
But we do not have national political consensus to do that - and insurance cannot address every emergency spending need. So support in Congress is coalescing around a different, more modest approach: make it easier for workers to set aside savings to meet short-term needs through payroll deductions.
The Strengthening Financial Security Through Short-Term Savings Plans Act is part of a package of proposals aimed at improving retirement security that is making its way through the legislative process. The bills have garnered bipartisan support, and also include provisions that would make it easier for small business owners to band together to offer professionally managed, pooled employer saving plans, along with some refinements of the existing 401(k) and savings system.
The short-term savings bill would permit employers to automatically enroll workers for accounts that deduct small amounts from pay into special savings accounts. These could be standalone accounts at banks or credit unions, or so-called sidecar accounts alongside 401(k)s. But in contrast to retirement accounts, funds in these accounts would always be readily accessible.
The Aspen Institute is one of several nonpartisan think tanks that have been working to shine a light on the importance of shoring up household resilience to financial shocks. ”I see this bill as a signal of growing bipartisan recognition of the importance of addressing a wider range of the financial challenges that families are coping with,” Ida Rademacher, executive director of the organization’s financial security program, told me in an interview. “It also reflects the importance of leveraging the workplace as key delivery channel for savings.”
Indeed, evidence is mounting that income volatility and the lack of financial buffers is affecting a large number of American households. Analysis of U.S. Census Bureau data by the Urban Institute shows that about 25 percent of families suffer at least one of three income disruptions over a typical 12-month period: an involuntary job loss, a health-related work limitation, or an income drop of 50 percent or more. Low-income households are hit hardest by the disruptions, but they also crop up in middle- and higher-income households.
Many families simply do not have any savings that could cushion the blow. One in four families have no nonretirement savings and 40 percent have less than $750 of such savings, the Urban Institute found.
The workplace is a logical area to attack the problem. Payroll deductions have proven an effective means of encouraging saving - especially when features such as auto-enrollment are added.
Kelley Long sees the problem frequently. She is a certified financial planner who advises workers in her job with Financial Finesse, a workplace financial wellness provider that provides one-on-one counseling and advice to employees.
“With some employers, it’s half of all the calls we field from employees,” she said, referring to queries about financial emergencies. “A large portion of these folks are in a financial crisis because they don’t have any nonretirement saving, and they’re debating pulling money out of their 401(k) accounts. They’re struggling with conflicting advice - 'should I get my employer match for the retirement account, or save for emergencies?'”
The standard financial planning mantra is to set aside three to six months' worth of emergency savings, but that is not practical in many cases, she said. ”We start out by suggesting that people try to set aside $1,000. and go from there.”
Small amounts do seem to make a difference. The Urban Institute found that if families can save up as little as $250 to $750, it reduces the likelihood of missing a housing or utility payment or the need to apply for public benefits.
For my money, more robust social insurance protections are a much better way to protect against financial emergencies. Social Security and Medicare do a good job protecting against the risk of lost income and health emergencies. Unfortunately, many states have cut back on unemployment insurance eligibility and benefits over the years, and reduced eligibility for Medicaid, the federal and state program that helps low-income Americans with medical costs. And the broad attack on the Affordable Care Act is undermining health insurance protections.
Insurance cannot cover all risks, such as fixing a broken hot water heater, roof or car, for example. But Rademacher agrees we should pursue both approaches - encourage saving, but also strengthen social insurance programs such as disability and unemployment. Emerging commercial solutions such as renters’ wage insurance also have potential, she thinks.
“I do think insurance is the most under-innovated area of financial services," she said. "With relatively stagnant wages and growing income volatility, the idea we will put the entire burden of insuring against these risks on the same households that are experiencing the stresses doesn’t make a lot of sense.”