The Aspen Initiative on Financial Security held its fourth annual Financial Security Summit in July in Aspen, Colorado. This is the fourth in a series of seven posts describing each Summit session. Links to the other posts and an overview of the Summit can be found here.
On the afternoon of July 16th, participants convened for a session titled, “Income Volatility and Economic Shocks.” This panel featured Fiona Greig, Director of Research at the JPMorgan Chase Institute; Jonathan Morduch, Professor of Public Policy and Economics at NYU; Michael Collins, Faculty Director of the University of Wisconsin Center for Financial Security; Garry Reeder, Director of Consumer Protection Practice at Blackrock; Rachel Schneider, Senior Vice President at the Center for Financial Services Innovation (CFSI); and was moderated by Josh Barro of The New York Times. The panelists explored several facets of income volatility—the causes behind it, how many families are impacted by it, what problems result from it, and potential solutions to address it.
First, Fiona Greig presented the findings of the JPMorgan Chase Institute’s report on income volatility, which utilized data from 100,000 Chase accounts and 135 million transactions. All income quintiles showed high levels of both income and consumption volatility, although income and consumption spikes did not necessarily move in tandem. One quarter of people experienced a change of more than 30% in their income in one year. “That is like adding or subtracting a housing budget from one year to the next,” said Greig. On average, families fell short of having a sufficient liquid asset buffer by $1,800, and the asset gap was even higher for lower income quintiles. Greig recommended tools to manage volatility such as real-time access to electronic funds, gradual tax refunds, automatic allocations of “positive shocks” to savings, and analytical tools to help people see the big picture financially.
Jonathan Morduch then presented findings from the US Financial Diaries project, which not only tracked families’ income and consumption data, but also gathered qualitative information on how families managed volatility. Like the JPMorgan Chase Institute study, the findings of the US Financial Diaries showed high levels of income volatility. “In all, five months out of the year, families were at least 25% off their average,” said Morduch, “That’s a very different picture of American financial lives than what we saw in the 1970s.” Morduch also found that low-to-moderate income families are hit harder with volatility, because they have more liquidity constraints. Families mitigate volatility by saving in the short-term—less than a year ahead of any shock. “Just because they aren’t accumulating much [of a] balance in their bank accounts doesn’t mean they aren’t saving,” said Morduch.
Rachel Schneider described some of the promising solutions being developed by the financial services industry. New apps like Digit and Even help smooth out “lumpy” payments and harness income spikes. “We have a lot of opportunity to rethink our financial services infrastructure in ways that better align with how people engage with their financial lives,” said Schneider. Michael Collins described a few solutions featured in his new book, A Fragile Balance, such as savings mechanisms within public benefit programs and debt management plans. Collins also brainstormed an “ideal” product for volatility management that would include a savings account, payment insurance, and a secured line of credit. Collins acknowledged that regulatory changes and subsidies might be necessary to create these product innovations. Garry Reeder stressed the need for more simplicity and flexibility for low-income consumers in financial markets. “We need to lower the cost of living in a volatile world,” said Reeder, recommending new insurance products rather than credit to pool volatility risk. “We have defaulted to credit as a solution, but it’s only capable of moving future cash flows into the present,” Reeder said, “This is not a viable long-term strategy when wages are declining.”
The panelists’ remarks generated ideas for solutions from the group, including using myRA as a short-term savings program to prevent early withdrawals from other retirement accounts, aligning tax refund distributions with high-consumption periods, providing micro-loans to help families save money with bulk goods, and instituting an “early warning” system for universities to provide students aid when their income drops. The volatility conversation helped remind participants that short-term savings are a key piece in the financial security puzzle. Experts on volatility will examine this issue further at the inaugural convening of Aspen IFS’s new Expanding Prosperity Impact Collaborative (EPIC) in December 2015.
Watch the video footage from this session here.