The stock market is booming, but $57 billion disappeared from 401(k) accounts in 2011. Why? Without emergency savings, millions of Americans who found themselves out of work, on the verge of losing their homes, or facing other financial emergencies were forced to raid their retirement accounts. In addition to incurring the standard penalties and taxes required when a worker does so, these individuals damaged their long-term economic prospects.
Today, half of Americans have no retirement assets, and those who do often neglect their rainy-day fund in favor of longer-term goals. President Obama wants to make a difference, and he announced the creation of a new “starter retirement account” — the “myRA” — in his State of the Union address earlier this year. Yet despite the best intentions, the administration’s current strategy to boost savings will likely fail. That’s because President Obama overlooks, as does Congress, a crucial point: The first step toward increasing retirement security is to stop thinking, and talking, so much about retirement savings.
The looming retirement-savings crisis is well documented. The National Institute for Retirement Security estimates that the nation faces a savings deficit of $6.8 trillion to $10.4 trillion and that the average working household has just $3,000 saved for retirement; just $12,000 in the case of near-retirement households. Low-income workers, workers of color, and those who are working part-time or for very small employers are less likely to have an account at all. Even for those lucky enough to have an employer-based account, hard times mean tough choices. According to personal finance firm HelloWallet, about one-fourth of all households will “breach” their retirement savings to pay for non-retirement needs.
For the ordinary American, the nation’s retirement savings crisis is just a savings crisis. Three in ten Americans don’t have a basic savings account. More than 40 percent of Americans don’t have an emergency fund big enough to let them survive for three months at the poverty level if they were to lose their job.
The government shouldn’t be telling workers without a savings account to put their money into a retirement vehicle. Yet next year, the federal government is set to spend nearly $150 billion subsidizing retirement savings and absolutely nothing supporting emergency savings. That money largely accrues to those with high incomes and provides little benefit to the vast majority of American workers. Individuals with higher incomes are more likely to work for an employer that sponsors a plan and more likely to participate in that plan. But that’s not the end of the story. The tax benefits of retirement savings are skewed toward the wealthy. In 2012, 80 percent of the tax benefits — actual tax-bill savings created when individual workers participate in 401(k)s and similar plans — went to the 20 percent of Americans with the highest incomes, according to the Center for Retirement Research at Boston College. The bottom 60 percent of Americans received just 8 percent of the tax benefits.
Still government officials and financial advisers almost universally advise workers to prioritize retirement savings, even those who do not have an emergency fund. Then, for these same workers, our policy choices make emergency withdrawals from retirement accounts inevitable when unexpected financial needs and crises arise. Worse still, the major retirement savings initiatives that have been proposed in this Congress primarily expand access to current savings arrangements, rather than fixing this flaw in the system. Instead of pushing more working-class Americans to save exclusively for retirement, policymakers need to recognize the necessary link between having flexible emergency savings and building sufficient retirement savings.
This is why myRA holds so much promise. President Obama and his team have aggressively marketed myRA as “starter retirement account,” but the accounts are built on a Roth IRA-like platform which allows withdrawals of contributions at any time without tax, fee, or penalty. MyRA fills a critical niche for a huge number of workers, from the low-wage employee without a savings account or retirement account, to the middle-income earner with a small 401(k) but only $1,000 extra in the bank.
The low-wage employee can start to build retirement savings with the confidence that the money is there if her car breaks down. The higher-wage earner can create a more robust personal safety net so that if something goes wrong she won’t need to crack open her retirement nest egg.
Unfortunately, the Obama administration is stuck pushing the myRA as a retirement account, and it is unlikely to make much impact.
In a new paper released in May, my colleagues and I lay out a plan to make myRA work. First, the Obama administration needs to acknowledge that myRA’s flexibility is a strength and not a liability. Many workers pass up a retirement plan because they rationally fear they might need the money for emergencies and do not want to put it in a retirement account, where it can’t be accessed without paying taxes and penalties. For them, flexibility is a selling point. Second, the government should offer the accounts to employers whether they offer a 401(k) or not, and market myRA as a supplemental account that protects their workers from emergency 401(k) withdrawals. Third, the administration should maximize myRA’s reach by making the accounts available to the self-employed, contract workers, and others with unsteady workplace connections. Accounts could be opened directly on the tax form to create an access point for millions.
Finally, no savings account will work at full scale unless it is automatic. Automatic account opening maximizes participation and minimizes economic and racial disparities in participation. The administration should ask Congress to allow employers to choose automatic enrollment for their employees, as employers that provide 401(k)s are allowed to do.
There’s widespread agreement among policymakers that Americans need to save more, but Washington’s single-minded focus on retirement savings ignores the fact that the bottom rungs on the household economic-security ladder are missing for tens of millions of Americans.
Americans need emergency savings and retirement savings, but the former must come first. MyRA can help, but only if policymakers stop focusing so much on retirement, and start focusing on saving.
Justin King is the policy director of the New America Foundation’s Asset Building Program.
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