Do You Have Emergency Savings to Get You Through a Crisis?

Half of Americans have no retirement assets, and those who do often neglect their rainy-day fund in favor of longer-term goals.

National Journal
Justin King
July 23, 2014, 8:32 a.m.

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.

HAVE AN OPIN­ION ON POLICY AND CHAN­GING DEMO­GRAPH­ICS? The Next Amer­ica wel­comes op-ed pieces that ex­plore the polit­ic­al, eco­nom­ic, and so­cial im­pacts of the pro­found ra­cial and cul­tur­al changes fa­cing our na­tion, par­tic­u­larly rel­ev­ant to edu­ca­tion, eco­nomy, the work­force, and health. Email Jan­ell Ross at jross@na­tion­al­journ­al.com.

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