People need support for nonretirement savings and debt repayment. Such assistance can help improve financial security and preserve resources for retirement. Many households have insufficient emergency savings and, as a result, struggle to make ends meet when faced with a financial shock. Every year, nearly half of adults over age 30 experience an unexpected financial event, typically at a cost of between $3,000 and $4,000. While most families expect to cover these costs using their savings, many households don’t have enough saved to cover that high a loss. As a result, two in five households expect to take six or more months to recover from a financial shock. A Federal Reserve survey found that over 40 percent of Americans did not have $400 in cash to pay for an emergency. They would have to borrow the money, sell something, or just not cover the expense at all.
Older people are more likely than younger people to have some level of savings. But they also have fewer working years to rebuild their finances after a financial shock. Having a pool of emergency savings in addition to retirement savings could reinforce the financial resilience of people and families of any age.
For all of these reasons, households need the ability to build emergency savings on an ongoing basis. Among other innovative, promising approaches is automatic enrollment in a plan that deposits payroll deductions into an easily accessible account. A renewed emphasis on enabling people to save for both retirement and emergencies at the same time is an essential part of financial resilience. Such approaches are preferable to payroll advance programs. The latter include fees that only increase the cost of dealing with an unexpected expense.
Student loan debt has become an increasing problem for older Americans, with more people entering retirement with student debt than ever before. In addition, younger people find it hard to both pay off their debts and save for retirement. Employers can currently provide tuition assistance as a tax-free benefit. One way to help people pay off this debt is to allow employers to provide debt repayment assistance as a tax-free benefit.
OTHER SAVINGS APPROACHES: Policy
OTHER SAVINGS APPROACHES: Policy
Consumers should have access to a range of safe, reliable, affordable, and customizable emergency and short-term savings options. This should include through payroll deduction or direct debit.
Policymakers should eliminate administrative and policy barriers to employers offering employees access to automatic enrollment into multiple savings programs for both retirement and nonretirement purposes.
States should change their laws to allow banks, credit unions, and other financial institutions to offer prize-linked savings opportunities.
Employers should explore helping their workers deal with common unexpected expenses through emergency savings programs instead of payroll advance programs that incur interest, fees, or other charges (see also Alternative Financial Services).
Repayment of student loans
Policymakers should allow employers to provide student loan-repayment aid as a tax-free benefit. For example, Congress could expand section 127 of the Internal Revenue Code on Educational Assistance Programs.