Family Finances

We Now See That Americans’ Lack of Emergency Savings is Dangerous, So We Need to Make Emergency Savings From Payroll As Automatic as Saving in a 401(k)

April 21, 2020  • Financial Security Program

Only weeks ago, when COVID-19 was a dangerous but distant virus, the lack of emergency savings in America already felt like a problem we should fix. But now, with the federal government sending $1,200 checks to the majority of American adults to pay for basics like rent and food, the lack of a safety net, including emergency savings, has proven to be an actual emergency, putting families’ physical safety and health at risk. Even in normal times, short-term, liquid savings – used to smooth volatile income and expenses, or to cover unexpected financial shocks – are a critical component of short-term financial stability. As we at the Aspen Institute Financial Security Program know, short-term financial stability and long-term financial security – which we believe everyone deserves – are deeply interconnected.

Given our long-term commitment to and expertise around retirement security for all through our Retirement Savings Initiative, we – along with partners and peers like AARP and the National Employment Savings Trust Insight Unit in the UK — have spent significant time developing and advancing the idea of pairing emergency savings with retirement savings, a structure that would allow for participants in a workplace retirement savings plan to automatically save for emergencies and retirement in two linked accounts that are funded from the same payroll deduction. In this model, these accounts work together, pausing contributions to the retirement account until the emergency account fills up, and then sending all contributions back to the retirement account once the emergency account fills. Payroll deductions continue automatically, so that the worker is defaulted into saving for two important needs.

Americans’ lack of emergency savings isn’t just damaging to short-term stability; it’s a real threat to long-term financial security, too.

But there are many different models and account structures for emergency savings at work – from standalone money market accounts offered by 401(k) providers, to traditional savings accounts at banks, to fintech applications. No matter where the money is housed or how it is accessed, all of these emergency savings-at-work options share two important requirements if they are going to work: they need to be funded on an ongoing basis from payroll, and they need auto enrollment to get savers started.

Americans’ lack of emergency savings isn’t just damaging to short-term stability; it’s a real threat to long-term financial security, too. As we heard loud and clear at our recent and fourth annual Aspen Leadership Forum on Retirement Savings, retirement savings leaders from across the ecosystem now recognize the ways that 401(k) participants’ lack of emergency savings is damaging to retirement balances, both preventing workers from participating because they can’t afford to “lock” their money away, and  leading 29% of job-changers to cash out their defined contribution retirement savings when they leave their employer. That and other leakage from retirement accounts produces balances that are 25% smaller on average by age 60.

For several reasons, automatic enrollment into workplace emergency savings isn’t yet happening in the United States. But 2020 is the year we’re going to double down with our partners in order to make this happen.

As part of Blackrock’s Emergency Savings Initiative, Blackrock has committed to supporting the Aspen Institute Financial Security Program’s work on emergency savings, with a strong focus on automatic emergency savings systems. At a time when 78% of Americans are living paycheck to paycheck, the initiative is focused on widening the range of emergency savings options Americans have access to, ranging from “traditional” workers, to gig workers, to students. With those tools in place, many more people will be able to build up their own personal safety net for emergencies like COVID-19.

The priority for leaders now must be emergency relief desperately needed to keep families afloat today, but when the economy eventually emerges from its lockdown, families will need more tools to save for future emergencies like this one. To spur action and ensure those options are available to families when that time comes, over the next two years Aspen FSP will be leading a series of efforts to increase the availability of automatic emergency savings programs:

  • Engaging with diverse partners like NEST Insight from the UK, fintechs, and nonprofit leaders to bring the best insights on “what works” in emergency savings to inform policy and product design
  • Convening an Automatic Emergency Savings Working Group to advance policies and products that enable employers and record keepers to build automatic emergency savings pilots and programs
  • Exploring and sharing what front line providers are learning about the impact of emergency savings on household financial security in the wake of COVID-19
  • Hosting virtual events on what policy makers and private sector leaders should know about the effects of COVID-19 on emergency savings and how the automatic emergency savings system should be bolstered when the crisis is over

Moments like this are when households need emergency savings most, and too many entered this crisis without enough. Coming out of this wave of social distancing and economic costs, households will need more and better options to build up an emergency fund, especially given the risk of a second wave of coronavirus. It’s past time to give them those tools.