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Many lower-income workers face growing economic instability. To help them, state policymakers are trying to make it easier for people to save . A few states such as California and Oregon have already started new retirement savings programs and others are following suit, with New Jersey being the latest to get into this space. Typically, employers above a certain minimum size need to offer a retirement plan at work or at least provide payroll deduction into a retirement savings account of workers’ choosing. Workers can use the money for retirement, but they can also withdraw some of the money for emergencies. Giving workers some flexibility in how they can use their savings will presumably increase participation in these programs, especially among lower-income workers.
Low-income and moderate-income families have particularly pressing needs for more savings that these state-sponsored plans could and should address . They have seen few wage gains over the past decade and their incomes have become less stable as the likelihood of a drop in wages due to a layoff, cut in hours, loss of overtime, among others, has gone up. Deunionization and a stagnant federal minimum wage have contributed to this increase in families’ economic instability. At the same time, costs for health care, education and retirement have gone up. Lower-income families in particular need more of both emergency and retirement savings. Moreover, 4 in 10 American adults would not be able to readily come up with $400 in an emergency. But lower-income families find it even harder to save than in the past amid low wage growth and greater income instability.
Lower-income families need to save more to smooth out short-term income fluctuations. Small emergency buffers between $250 and $500 can make a huge difference when a car breaks down, for instance, or when workers face even small financial shocks such as government fines and overdraft fees. Without some emergency savings, they need to rely on their friends and neighbors to help them out, which doesn’t often happen when money is tight. Families then turn to excessively high-cost loans such as payday lending to tide them over. Such loans can put them into a deep hole financially. Even small amounts of savings could help families avoid a spiral of rapidly growing costs and risks.
So much for the basic arguments for more savings, but can low-income workers actually save? Research has repeatedly shown that low-income families can indeed save, but they, just like higher-income workers, need extra help. A new report recently released by the Aspen Institute highlights again that lower-income households can indeed save. The new research, co-authored by experts from nine non-profit organizations focused on helping lower-income households save, highlights a few key lessons for policies intended to help lower-income workers save more.
More short-term economic stability makes it easier for people to save more. One standard economic argument suggests that families should know that their income is unstable and thus be willing to save more. The evidence, though, suggests that the logic runs the other way around. Families need some predictability of their incomes to make them breathe a little easier. They then can focus more easily on their future, knowing, for example, that their basic expenses are covered. The general policy implication is to make it easier for people to get help from programs such as the earned income tax credit (EITC), for instance, through a partial refund of the EITC during the year. The payoff will not only be more economic security now, but also in the future.
A related implication is that workers need emergency savings to help them bridge short-term fluctuations in their incomes. State-sponsored retirement savings plans then should make it relatively easy for workers to access their savings in an emergency. Workers will be more willing to put money away in a separate account when they know that they can get to it when they need it.
The flexibility of how workers can use their money is only one aspect of good savings policy design. Another key insight is that economic incentives work. Such incentives could come in the form of matches from non-profits, whereby workers receive extra money proportional to their savings. Under a 1:1 match, for instance, a worker would receive an extra dollar for each dollar that she puts away. Two decades of experiences with Individual Development Accounts (IDAs) in addition to other research have shown that matches boost savings among lower-income workers. Moreover, workers may be willing to put their tax refunds into savings accounts if policymakers make it easy to do so. Tax refunds are obviously workers’ own money, but they also constitute money that people saved over the course of a year. The goal is to help workers save the money for a little longer.
Lower-income families will eventually save more for their future if states can offer them such financial incentives. Those could come in the form of government matches, for example, and easier use of tax refunds for savings.
Helping people save more is only one part, although a crucial one, to help lower-income families gain more economic security. Families also need higher and more stable incomes. Higher minimum wages, expanded social safety nets and more opportunities to join a union are important steps to improving income security for low-income and moderate-income families. State-sponsored savings programs are important complements to these income support measures.
