Column: Idea of payroll deductions to meet emergency
needs gains steam in U.S.
Send a link to a friend
[August 27, 2018]
(The opinions expressed here are those of the author, a
columnist for Reuters)
By Mark Miller
CHICAGO (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 prospects.
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 insurance.
![](http://archives.lincolndailynews.com/2018/Aug/27/images/ads/current/Peasley_sda_prom_050214.png)
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.”
WORKPLACE SOLUTION
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.
[to top of second column] |
![](../images/082718pics/busine22.jpg)
A sidewalk sign points to the emergency entrance
at the University of California San Diego in La Jolla, California,
U.S., March 23, 2017. REUTERS/Mike Blake
![](http://archives.lincolndailynews.com/2018/Aug/27/images/ads/current/graue_18_cruze_081418.png)
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 added.
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 emergencies?'”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.
![](http://archives.lincolndailynews.com/2018/Aug/27/images/ads/current/stclara_lda_2018.png)
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)
[© 2018 Thomson Reuters. All rights
reserved.] Copyright 2018 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content. |