August 23, 2018 / 10:04 AM / 10 months ago

COLUMN-Idea of payroll deductions to meet emergency needs gains steam in U.S.

 (The opinions expressed here are those of the author, a
columnist for Reuters.)
    By Mark Miller
    CHICAGO, Aug 23 (Reuters) - Stuff happens. And when the
stuff comes in the form of an economic emergency, we all need a
way to cushion the financial blow.
    Job loss, health emergencies or a fall in income can
destabilize households, and having a backup can mean the
difference between keeping a roof overhead and facing crushing
debt or bankruptcy. Such financial jolts also force workers to
make premature withdrawals from retirement accounts, incurring
penalties and taxes and hurting their long-range retirement
    There is growing consensus in Washington that the inability
of many American families to cope with economic blows is a
serious problem that needs fixing. The most efficient, robust
solution would be to strengthen our key social insurance
programs: Social Security, health insurance and unemployment
    But we do not have national political consensus to do that -
and insurance cannot address every emergency spending need. So
support in Congress is coalescing around a different, more
modest approach: make it easier for workers to set aside savings
to meet short-term needs through payroll deductions.
    The Strengthening Financial Security Through Short-Term
Savings Plans Act is part of a package of proposals aimed at
improving retirement security that is making its way through the
legislative process. The bills have garnered bipartisan support,
and also include provisions that would make it easier for small
business owners to band together to offer professionally
managed, pooled employer saving plans, along with some
refinements of the existing 401(k) and savings system.
    The short-term savings bill would permit employers to
automatically enroll workers for accounts that deduct small
amounts from pay into special savings accounts. These could be
standalone accounts at banks or credit unions, or so-called
sidecar accounts alongside 401(k)s. But in contrast to
retirement accounts, funds in these accounts would always be
readily accessible.
    The Aspen Institute is one of several nonpartisan think
tanks that have been working to shine a light on the importance
of shoring up household resilience to financial shocks. ”I see
this bill as a signal of growing bipartisan recognition of the
importance of addressing a wider range of the financial
challenges that families are coping with,” Ida Rademacher,
executive director of the organization’s financial security
program, told me in an interview. “It also reflects the
importance of leveraging the workplace as key delivery channel
for savings.” 
    Indeed, evidence is mounting that income volatility and the
lack of financial buffers is affecting a large number of
American households. Analysis of U.S. Census Bureau data by the
Urban Institute shows that about 25 percent of families suffer
at least one of three income disruptions over a typical 12-month
period: an involuntary job loss, a health-related work
limitation, or an income drop of 50 percent or more. Low-income
households are hit hardest by the disruptions, but they also
crop up in middle- and higher-income households.
    Many families simply do not have any savings that could
cushion the blow. One in four families have no nonretirement
savings and 40 percent have less than $750 of such savings, the
Urban Institute found.
    The workplace is a logical area to attack the problem.
Payroll deductions have proven an effective means of encouraging
saving - especially when features such as auto-enrollment are
    Kelley Long sees the problem frequently. She is a certified
financial planner who advises workers in her job with Financial
Finesse, a workplace financial wellness provider that provides
one-on-one counseling and advice to employees.
    “With some employers, it’s half of all the calls we field
from employees,” she said, referring to queries about financial
emergencies. “A large portion of these folks are in a financial
crisis because they don’t have any nonretirement saving, and
they’re debating pulling money out of their 401(k) accounts.
They’re struggling with conflicting advice - 'should I get my
employer match for the retirement account, or save for
    The standard financial planning mantra is to set aside three
to six months' worth of emergency savings, but that is not
practical in many cases, she said. ”We start out by suggesting
that people try to set aside $1,000. and go from there.”
    Small amounts do seem to make a difference. The Urban
Institute found that if families can save up as little as $250
to $750, it reduces the likelihood of missing a housing or
utility payment or the need to apply for public benefits.
    For my money, more robust social insurance protections are a
much better way to protect against financial emergencies. Social
Security and Medicare do a good job protecting against the risk
of lost income and health emergencies. Unfortunately, many
states have cut back on unemployment insurance eligibility and
benefits over the years, and reduced eligibility for Medicaid,
the federal and state program that helps low-income Americans
with medical costs. And the broad attack on the Affordable Care
Act is undermining health insurance protections.
    Insurance cannot cover all risks, such as fixing a broken
hot water heater, roof or car, for example. But Rademacher
agrees we should pursue both approaches - encourage saving, but
also strengthen social insurance programs such as disability and
unemployment. Emerging commercial solutions such as renters’
wage insurance also have potential, she thinks.
    “I do think insurance is the most under-innovated area of
financial services," she said. "With relatively stagnant wages
and growing income volatility, the idea we will put the entire
burden of insuring against these risks on the same households
that are experiencing the stresses doesn’t make a lot of sense.”

 (Editing by Matthew Lewis)
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