On Friday Congress passed and the President signed legislation that will prevent another partial government shutdown like the one last month that captured headlines for weeks. But beyond the headlines, the shutdown also served as a very public reminder of a widespread reality in urgent need of solutions: far too many American families are a paycheck away from financial distress.
A survey by Prudential of furloughed workers, contractors, and their spouses found that during the shutdown, 40 percent borrowed money from family and friends, 25 percent visited a food bank, and 23 percent reduced or stopped spending on health care for themselves or a family member.
Nearly half of U.S. households have little or no buffer
These painful financial tradeoffs are all too familiar to all working families, not just federal employees and contractors. Nearly half (46 percent) of all U.S. households say they couldn’t cover three months or more of living expenses without borrowing money or withdrawing from their retirement accounts; according to the US Financial Health Pulse, 20 percent have between one and two months of living expenses saved, 15 percent have one to three weeks, and 11 percent have less than one week.
The shutdown lasted just short of five weeks. That’s about three weeks shorter than a typical spell of unemployment for those currently looking for work. And while federal employees received back pay, many government contract employees—who are often paid far less and do not qualify for employer benefits—will not.
Retirement security at risk
In addition to the temporary hardship of delayed and lost wages, the shutdown also produced untold long-term consequences for families’ finances. During the shutdown $140 million flowed out of the federal Thrift Savings Plan, the defined contribution retirement plan for federal employees, in the form of hardship withdrawals. This represents a 26 percent increase from the same period the year before. These withdrawals often come with a 10 percent penalty and are taxed at the saver’s top marginal tax rate, making them a last resort for cash. Spending retirement assets in an emergency reduces the size and earnings potential of an employee’s nest egg, undermining their long-term financial security.
Solutions to build financial resiliency
So whether it’s an unexpected medical bill, a car repair, or even the next shutdown, what can be done to better prepare US households for emergencies?
First, there’s what not to do. In the wake of the shutdown, a barrage of personal finance columnists have wagged their fingers at the public for not having saved more, using the plight of furloughed workers as a cautionary tale. Lecturing people is insensitive, ineffective, and could lead to feelings of shame and resignation.
The truth is that our financial systems are not set up to help us build the kind of liquid assets we need in an emergency. Unlike discounts for consumption, jackpot lotteries, and even tax-preferred retirement accounts, there is little in the way of rewards for saving for a rainy day.
Fortunately, a host of tools and new ideas are emerging to help people build a modest cushion to weather a financial emergency. Employers, in particular, are starting to realize that in addition to raising wages, they have untapped influence over their employees’ financial wellness. Compelling evidence suggests that financial stress takes a toll on the bottom line and that employees want help from employers on financial issues. From free financial coaching, to pay-advance options, to student loan repayment assistance and employer-facilitated loans, employee financial wellness programs are gaining popularity.
One emerging idea not yet in the market is an opt-out payroll deduction emergency savings account. Opt-out means that employees are automatically enrolled but can choose not to participate—a strategy that has led to high participation in 401(k) programs. At AARP, we surveyed a nationally representative sample of workers and found that 71 percent of employees would participate in such a program if their employer offered one. Notably, support for the program was not correlated with income, but rather with financial stress.
Helping employees save for emergencies is a win-win
Employers, financial institutions, and benefits providers are eager to learn more about what employees truly value in a workplace financial wellness program. Our research shows that helping employees save automatically for emergencies is one solution with broad appeal. As the shutdown reinforced, help preparing for the next financial emergency is something that would make a real difference in the financial lives of millions of households.
Catherine Harvey is a senior policy advisor at the AARP Pub
lic Policy Institute, where she works on public policies and market solutions to help people save for their goals