Wolf At the Door, No Money In the Cupboard

Millions Of Americans Have No Emergency Savings. Some Policy Tweaks Could Change That.

The 16-day government shutdown has come and gone. But amid the countdown clocks, panda cam panic, and happy hour deals for furloughed workers, there’s one crucial thing the media missed: the quiet unfolding of 8,200 private financial disasters. That was the number of federal employees who took hardship withdrawals from their retirement accounts to cover their expenses while their paychecks were withheld. And those federal withdrawals are a canary in the coal mine: More than one-quarter of Americans with 401(k)-style plans have dipped into their accounts early, according to a recent report from financial guidance company Hello Wallet.

The shutdown wasn’t just a sign of congressional dysfunction; it was a wake-up call to a savings crisis that’s threatening the financial stability of families and individuals of all ages. Half of Americans don’t have enough money in the bank to pay their bills for three months, while a quarter have no emergency savings whatsoever. Most American households are totally unprepared to cope with the unexpected.

So when life happens—an unexpected illness, a car accident, a home repair—workers tap into retirement funds. These “breaches” add up to a staggering $70 billion in annual withdrawals. And workers can’t access the funds without a hefty price tag: Withdrawals are both taxed as income and subject to an additional 10 percent penalty. Federal workers who take a hardship withdrawal are barred from further account contributions, including the employer match, for six months. According to Hello Wallet, a lack of emergency savings is the most common reason for retirement account breaches.

Washington hasn’t fixed this problem. But in California, policymakers have taken the lead in helping low-income workers save for retirement by establishing a new program that will automatically enroll private-sector workers who lack access to a workplace retirement plan into portable, low-cost retirement accounts. The next frontier is helping people save for emergencies.

We need policies that support families to develop flexible savings—so that they’re stashing funds not only for age 65 but also today. One way to do this would be by offering state retirement plans that include an option of setting aside some small percentage of income for a flexible-use account. This would be especially helpful in emergencies.

Federal policy could encourage short-term savings as well. The U.S. tax code has long served as a vehicle for creating savings incentives. Yet the vast majority of its benefits, especially those to support retirement, accrue only to wealthy families. The Financial Security Credit, a bill introduced in the U.S. House of Representatives last summer, would enable low and moderate-income households to divert a portion of their tax refund into a savings product of their choice. There would be a match of up to $500 in additional savings to help lower-income workers develop an adequate balance.

Even as we try to fix our retirement savings system, we shouldn’t lose sight of the fact that retirement is only one piece of the savings puzzle. People are more likely to build retirement savings when they also save for the unexpected. The shutdown forced a lot of families to take a detour. California can show how to get them back on track.

Aleta Sprague is policy analyst in the Asset Building Program at the New America Foundation.
Primary Editor: Joe Mathews. Secondary Editor: T.A. Frank.
*Photo courtesy of NoHoDamon.
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