Solutions to Expand Emergency Savings

Chantel Sheaks
Vice President, Retirement Policy, U.S. Chamber of Commerce

Published

October 13, 2023

On October 10, 2023, AARP and the U.S. Chamber of Commerce devoted an entire day to the topic of emergency savings, bringing together researchers, employers, policymakers, and regulators to discuss policy and industry solutions to expand emergency savings.

Research

To lay the groundwork, the first panel discussed the research and data on why Americans need emergency savings. Nearly one-quarter of consumers have no emergency savings, and 39 percent have some but less than a month of income. It was especially noteworthy that the data shows that this is not just a lower and middle-income need.

It was not surprising that 60 percent of households with income of $20,000 or less had no emergency savings, but what many may not expect is that 47 percent of households with $80,000 to $125,000 and 39 percent of households with more than $125,000 did not have any emergency savings. However, emergency savings went up with age and education, and those with retirement accounts also tended to have emergency savings.

To meet emergency needs, people are turning to high-cost credit, including payday or auto-title loans, early withdrawals from retirement savings, and overdrafts on checking or savings accounts. However, emergency savings accounts could not only eliminate the need to turn to these but also improve outcomes for employers and employees.

Preliminary data shows that overall emergency savings programs can lower attrition and increase promotions and raises, as well as increase job satisfaction, especially among blue-collar workers. All of this shows the ROI for both employers and employees because the constant worry over finances is a drag on employees’ ability to perform.

In fact, case studies have shown that employer-provided emergency savings programs have lowered accidents for a trucking company and Increased empathy and safety for nurse aides. The trucking company case study showed that a relatively small investment by the company of less than $120 per year per employee nets a huge result in lower accidents, injuries, and fatalities.

But with any nascent field, there is still more research needed, such as:

Data on what “emergencies” are being covered
Understanding the flow of emergency savings
How are emergency savings accounts actually helping
Why middle-income workers don’t have emergency savings
What are the “shocks” that people experience that could be covered by emergency savings
Why financial stability is increased, but wealth is not, and how it can be

Current Employer Programs

Although more research is needed, many employers are not waiting to implement these programs. For example, Blackrock’s three-year-old Emergency Savings Initiative has 10 million people with over $2 billion.

We started the second panel hearing from an employer that just implemented its emergency savings program within the last two months, and 65 percent (and growing) of its employee population have signed up. As the employer represented noted, you just need to do something and get them into saving and keep them saving. It was noted that this does not necessarily mean a full-blown emergency savings program with an employer match but can be as simple as a savings program with employee only contributions. It is also important to let employees use the savings in ways that work for them, not how you think it should be used.

The panelist discussed different avenues for engaging employees, including how to reach employees who are interested but may not be able to save for financial emergencies. One way to do this is to give people permission to start with baby steps and small goals that they feel are attainable. The panelist said that employers need to reach employees where they are, including enlisting affinity groups and social media, taking out the friction to enrolling, making it easier to sign up, and making funds accessible.

Yet, at the same time, employers still feel the tension between encouraging accumulation and knowing that the funds in these accounts are meant to be used and the use is unpredictable. This is because some employers are trying to think about this from a retirement savings perspective, but it doesn’t carry over to the short-term savings space. However, the lack of short-term and emergency savings can endanger retirement savings.

Speaking of retirement, the panelists put to rest the fear that emergency savings would crowd out retirement savings. One service provider found that they were not seeing a one-to-one decrease in elective deferral for each dollar put into emergency savings. The other service provider seconded that, stating that they had not seen a “crowd out” effect on elective deferrals. In fact, the employer on the panel stated they had a 95% participation rate in their 401(k) plan before they implemented their program, and they have not seen any drop in elective deferrals.

In the end, we know that there is a real role for employers in financial wellness and emergency savings, and the first step is talking to your employees to see what they need and then look at the data,

Diverse Communities

However, not all individuals have the same needs, and our fireside chat focused on emergency savings and wealth equity for diverse groups. Our first panelist discussed research on the financial aspirations of black households and barriers to achieving them. The panel also discussed barriers that impact savings for different communities, such as the unique caregiving responsibilities in the LBGTQ community. There also is the need to address limited English proficiency, immigrant status, mistrust of the financial system, and high housing costs facing Asian and Pacific Islander communities.

Although most of the focus recently has been on employer-provided savings, given the income and job volatility in many diverse communities, such as part-time, gig, and subcontracting work, other avenues need to be explored, including engaging community-based organizations to improve financial well-being, including one-on-one counseling. However, work needs to be done to encourage mainstream banks to offer these services.

Policy

Emergency savings have gotten notice from policymakers, including two new provisions in the SECURE 2.0 Act, enacted in late 2022. One would allow emergency withdrawals from 401(k) plans, and the other would allow employers to have an emergency savings account within the 401(k). The panel discussed a number of implementation constraints, but the agencies expressed the need to hear from stakeholders on what guidance they need to implement these provisions in an efficient and effective way.

There is still plenty of room for growth in the policy arena, including policy on out-of-plan solutions, allowing de minimis employer contributions on a tax-preferred basis, and start-up credits for emergency savings accounts.

The Way Forward

This led to our last panel that discussed where we go from here. This panel discussed the metrics around progress made in emergency savings and laid the foundations for the next steps, including addressing barriers to savings and the role of emergency savings in wealth-building efforts. Progress has been made.

The chief of the research division of the Federal Reserve Board of Governors highlighted that while there have been improvements in the share of Americans who can cover an unexpected $400 expense, more work is needed to help all Americans be prepared for financial emergencies. Also, more work is needed to understand the role of household debt, including categorizing how different types of household debt affect the ability to save for emergencies.

The panel closed by seconding the prior panel’s comments on the necessity for future policy to advance out-of-plan options to save for emergencies and ways to integrate the savers match introduced in SECURE 2.0 to reach Americans with low and moderate incomes.

AARP and the U.S. Chamber of Commerce look forward to working together to move forward on emergency savings.