This article first appeared in the Stanford Social Innovation Review blog on January 28, 2016.
Findings from the US Financial Diaries and other new research provide compelling evidence that growing numbers of low- and middle-income American households are experiencing high levels of financial uncertainty and volatility. Before these studies, when Bureau of Labor Statistics data came out each year, familiar headlines spoke of long-term trends in wage stagnation, and increasing disparities between top earners and everyone else.
On the face of it, a combination of wage stagnation and income volatility seems implausible. But annual data masks as much as it reveals about the working conditions experienced by US households. During the same three decades when annual wages have stayed flat, the structure of work has shifted dramatically, and it is accelerating even faster with the rise of the gig economy. Unlike the stable jobs and steady incomes more common during the middle of the last century, millions of American workers are piecing together incomes with contingent and part-time work, trying to layer multiple jobs to make ends meet. Annual earnings may be flat year-over-year, but the process of earning those dollars is an exhausting pursuit that crowds out other parts of life, not least planning for the long term.
That’s understandable. Instability breeds instability. And lower-income households tend to face many more restrictions on how they can access their money and manage their finances, which is the opposite of what they need to flexibly and creatively manage the greater levels of volatility they face.
We’ve long used the metaphor of a three-legged stool to describe the set of strategies that worked together to help build long-term retirement security—employer contributions, personal savings, and social security. And even as we work to strengthen some of the legs that have become rickety on that stool, it is now clear that a long-term focus on financial security is insufficient. We still need to think about the future, but we also need a “step-up” stool to shore up short-term financial security. Otherwise, the long-term stool will be unreachable and irrelevant to too many American workers.
The First Step: New Metrics
Traditionally, we’ve used annual wage and benefits data to measure job quality and worker wellbeing. That’s no longer sufficient, especially not as a guide for designing and evaluating policies that can improve the financial stability of workers. Using them as the sole basis for pragmatic policy solutions would make as much sense as consulting a climate change report to inform your daily wardrobe selection.
The new research featured in this article series has illuminated hidden dynamics. A first step to making sure we can design, experiment with, and adjust policy approaches to successfully address short-term volatility is to ensure ongoing collection, access, and analysis of similar data. That will require investment and cooperation between government agencies and nonprofits (to collect and share administrative and survey data), the private sector (to provide researchers with access to anonymized data from financial services firms and employers), and funders.
With good data we can develop good metrics to evaluate progress in shoring up households’ short-term finances.
Building the Short-Term Stability Three-Legged Stool
The traditional long-term security stool has three legs; the “step-up” stool we need to shore up short-term financial security does too: emergency savings, credit, and insurance.
1. Emergency Savings. On the savings front, workers who are already struggling to make ends meet have a difficult time setting funds aside. Even so, the US Financial Diaries data show that large percentages of cash-strapped households are “saving for soon,” and surveys by Gallup and Fidelity indicate widespread desire among low- and moderate-income households to save more. For too long, we’ve either ignored short-term savings or treated them as unimportant. Given the current and historical policy bias toward long-term savings, we need to spend consistent, focused energy on policies than can also help build a financial cushion to weather short-term shocks. Tried-and-true ideas include the Savings Bond and SaveUSA. Newer ideas include the Rainy Day Earned Income Tax Credit (which would allow EITC recipients to defer when they receive some of their refund), Intuit’s Refund to Savings pilot, prize-linked savings, and even new “side car” accounts that allow firms to offer emergency savings plans alongside retirement plans. All of these could help families amass small sums that would help smooth the roller-coaster ride of month-to-month volatility, reduce a household’s reliance on expensive debt, and potentially open a pathway to broader financial goals, including retirement security. In addition to increasing the ways we incent savings behavior, we should also remove existing policy disincentives, such as asset limits in public benefits programs that require applicants to sell their cars or spend down retirement savings before they are eligible for short-term assistance.
2. Small Dollar Credit. Credit is another essential tool to help smooth volatility, but only if the terms are transparent and fair, and the creditor has the ability to repay. Credit is valuable tool if the user is “illiquid,” but it could do more harm than good if they are insolvent. Even with this caveat, there are a large number of low-income households that face liquidity constraints but that the Consumer Financial Protection Bureau (CFPB) describes as “credit invisible”—people who do not have credit records with the major credit bureaus. Policies allowing alternative ways to measure and predict credit worthiness—such as savings patterns, and on-time bill and rent payment—would go a long way toward expanding access to credit for millions of Americans. This, coupled with new regulatory oversight of the small dollar credit market by the CFPB, would improve access to safe and affordable credit products.
3. Social Insurance and Portable Benefits. We should also explore ways to update and improve current forms of social insurance and benefits to minimize the size and frequency of shocks workers must manage with savings and credit. There has been growing support in recent months for making benefits and worker protections more portable and accessible to all forms of workers. The recent implementation of Obamacare is one example of a reform that has expanded coverage to more than 17 million Americans since its launch. Even so, high deductibles are still a major expense shock for families, so there is room for more innovation around supplemental health insurance. The unemployment insurance system was originally designed to help ease the financial shock of losing a job, but eligibility and benefits have eroded over the years, and now only a fraction of today’s unemployed qualify for assistance. Reforms at both state and federal levels could improve the utility of unemployment insurance, and President Obama’s recent proposal introducing new wage insuranceis also a step in the right direction.
While we must make addressing the emerging challenge of volatility and short-term security a priority, the inadequacy of long-term savings and retirement security also remains a foundational crisis for American households, especially for low-income and minority households. Even when incomes were more stable and more of the population saw rising wages, too many American households were not saving for retirement. Today, more than a third of households have no retirement savings whatsoever. And while there are some truly transformative policy and market innovations gaining support that can help improve the situation, success will ultimately come only when we begin to view short- and long-term financial security as one unified field of focus. We cannot solve the financial stress and anxiety that grips workers in America today without addressing the underlying causes of financial insecurity, both now and later. Now is the time to take up the hard work crafting a holistic approach to improving both short- and long-term financial security for current and future generations.
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