Retirement-linked emergency savings - does it work?
Americans have historically struggled to save money, for several reasons. According to a 2020 report by the Federal Reserve, 35% of Americans would be unable to pay an unexpected $400 bill out of their savings (others report up to 45%), and most would pay for it by going into credit card debt. Of those,12% would be unable to pay the expense by any means.
Even before Covid-19, many Americans were living check to check, because of the costs of housing and childcare, student debt payments, medical bills, and the rest. A few years back, a typical middle-class lifestyle in the U.S. was 30% more expensive than it was 20 years earlier; in fact, in some cases the cost of daily life over the last 20 years had doubled, according to the Economic Hardship Reporting Project.
And while the pandemic has presented Americans of all income levels with financial challenges, these hardships have been exacerbated for low- and middle-income families. As experts suggest, it’s more clear now than ever before that “financial insecurity and racial inequity destabilize not only our households, but also our democracy and the economy”.
Are there ways to help our families weather financial hardships?
Yes, there are! Linking emergency savings and retirement savings is one of several ways to meet people’s emergency savings needs. Sometimes you’ll hear this described as “sidecar” accounts.
There are plenty innovative ideas out there. UPS and Prudential are helping workers build-up their emergency fund by offering programs that automatically deduct money from paychecks.
Another great example is Maryland$aves, a state-facilitated automatic enrollment payroll savings program that is scheduled for launch this summer. Its default investment option will be a liquid emergency savings account combined with a professionally managed Roth IRA account.
So far, evidence has been encouraging. One needs look no further than the cutting edge of workplace emergency savings: Nest Jars.
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In 2008 the UK passed a significant pensions act aimed at increasing workplace retirement plan coverage. The act created country-wide automatic enrollment and established the National Employment Savings Trust (Nest, for short) as a public provider for employers who didn’t have or choose a private sector provider. Nest took its first contributions in 2011 and 10 years later, the program is serving almost 10 million savers - a third of the UK working population –and managing £17.6 ($23.8) billion in net assets.
In 2018 Nest Insight, a research unit set up by Nest, implemented an emergency savings trial by exploring the use of retirement-adjacent sidecar savings account for UK employers called “Jars”.
How does it work? Workers opt into Jars and can make additional contributions on top of their automatic enrollment contributions. Once the balance in that account reaches the “savings cap”, future contributions flow into the retirement savings account. When workers withdraw funds from the emergency savings account - reducing the balance below the savings cap- additional contributions once again flow into the account.
Just last year, Nest Insight published early findings on how well Jars is meeting the emergency savings needs of workers enrolled in the program. Early indications are encouraging:
The sidecar saving concept appeals to many employees (around 60% of those surveyed), particularly those who are currently struggling financially (80%).
The payroll deduction mechanism and ease of getting started with saving are valued by employees.
Jars has brought people who may not have previously had a financial buffer in place to protect them from income and expenditure shocks into saving.
Users are saving persistently once they have signed up and very few accounts have been closed.
There are early anecdotal indications of a positive impact on financial wellbeing, resilience and confidence.
Although in line with that of other opt-in payroll saving tools and comparable to trial results of other US workplace savings models, take-up of Jars is low. Nest researchers have found that there appears to be significant barriers to signup, suggesting that automatic enrollment may be key to scaling up participation.
There might be plenty of debate about its effectiveness. But the evidence around the logic for why we think tools like sidecar models (done well), can have a positive impact, is already strong. Although there are still some gaps in our understanding on key design choices, it’s worth leaning more from these examples. So, keep an eye out for Jar’s final program evaluation.
There is a role of retirement and emergency savings in financial security. We should have enough slack in our budgets to allow for savings and the ability to make choices, even in extraordinary times.
Watch this space! - Paulina
Paulina Diaz is a public finance optimist who has woven together a career of public service and philanthropy. Paulina believes in using data frameworks to drive further impact and restoring the idea of maximizing people’s opportunities through public policy, research, and innovation.
This piece was featured in the January 27, 2022, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.
