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Many families struggle to come up with money when faced with an unexpected $400 expense.
This lack of emergency savings may force them to borrow money at high interest rates to pay for the surprise expense, putting their financial security at risk.
Congress now has a window to address this problem by clearing the way for new emergency savings plans during the lame duck session.
Three emergency savings proposals can be included in a legislative package known as Secure 2.0which should amplify the changes brought to the pension system by the Secure Act in 2019.
“We are on the cusp of a significant change in the way people save for emergencies in this country, thanks to public policy and private sector innovation,” said Shai Akabas, chief policy officer. economics at the Bipartisan Policy Center, during a recent online panel. hosted by the Washington, DC Think Tank.
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The roundtable coincided with an open letter from the Bipartisan Policy Center Action with 40 organizations to Senate Majority Leader Chuck Schumer, DN.Y., and Minority Leader Mitch McConnell, R-Ky., as well as House Speaker Nancy Pelosi, D -Calif., and to Minority Leader Kevin McCarthy, R-California.
The letter called for the inclusion of three bills that would boost emergency savings in the pending retirement package.
“We strongly believe that the emergency savings policy aligns with the goals of the U.S. retirement system and will help build the financial resilience of U.S. households,” they wrote.
Why emergency savings are insufficient
Anti-eviction banners are displayed on a rent-controlled building in Washington, DC on August 9, 2020.
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The Covid-19 pandemic has been a stress test for many Americans’ finances.
As many sectors of the economy shut down, many individuals and families found their incomes reduced or completely eliminated.
The federal government stepped in and sent unprecedented amounts of aid through three rounds of stimulus checks, enhanced federal unemployment benefits, direct monthly child tax credit payments to parents and other policies.
Yet the pandemic has still led some workers to withdraw funds from their 401(k) or other retirement savings accounts, jeopardizing their long-term financial future.
Those who had at least $1,000 in emergency savings at the height of the pandemic were half as likely to withdraw from their retirement savings accounts, according to the Aspen Institute.
“As people deal with this crisis, you need these liquid savings to protect your long-term investments and ensure you have a secure retirement and build wealth,” said Tim Shaw, associate director of policies at the Aspen Financial Security Program, at the Bipartisan Strategy Center Panel.
Covid relief measures helped push the share of families who could cover an unexpected expense of $400 in cash or an equivalent method for 68% in 2021an increase of 4 percentage points from 2020. This is also the highest level since the Federal Reserve launched the survey in 2013.
Still, 1 in 3 households would need to borrow money to cover a $400 emergency, which is still “way too much,” Shaw noted.
How 3 Proposals Can Incentivize Savings
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Proponents hope three proposals that could help encourage emergency savings will be included in Secure 2.0.
This includes two bills proposed by Sens. Cory Booker, DN.J., and Todd Young, R-Ind., plus a third created by Sens. James Lankford, R-Okla., and Michael Bennet, D-Colorado.
A proposal by Booker and Young would allow employers to provide workers with emergency savings accounts in addition to their retirement savings accounts. Employees could automatically set aside up to $2,500 that they could access at any time in the event of an emergency.
Booker and Young’s second proposal would allow for separate stand-alone plans outside of retirement accounts, which would be “really important” for employees who don’t currently have a retirement plan through their employer, Akabas noted. .
A third, the Lankford-Bennet plan, would allow workers to withdraw up to $1,000 from their retirement accounts without penalty in an emergency. These withdrawals would only be allowed once a year; additional contributions would be required before making another withdrawal.
Chantel Sheaks, executive director of retirement policy at the U.S. Chamber of Commerce, said she has her fingers crossed that all three proposals become part of Secure 2.0 and the legislation passes.
“From an employer perspective, we need choice,” Sheaks said.
What may work for one employer may not work for another, she noted. The three proposals would allow for more options, including potentially encouraging employers who don’t currently have pension plans to consider adopting them, Sheaks said.
Plus, because hardship withdrawals can reduce workers’ retirement security, these emergency savings options can help prevent these barriers to wealth creation.
“People have emergency needs today, and we can’t forget those emergency needs,” Sheaks said. “We have to find a way to balance the needs of today with the needs of tomorrow.”