People need support for non-retirement savings and debt repayment. Such assistance can help to 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, 60 percent of American households experience at least one financial shock due to unforeseen expenses at a median cost of $2,000. While most families expect to cover these costs using their savings, about 41 percent of households don’t have enough saved to cover that high a loss. As a result, 55 percent of families who deal with a financial shock struggle to make ends meet, sometimes for months afterward. A Federal Reserve survey found that 47 percent of Americans could not raise even $400 in an emergency and would have to borrow the money, sell something, or just not cover the expense at all.
While individuals with lower incomes tend to save the least as a percentage of their income, many middle- and upper-income households struggle to save as well. The situation is even more serious for older Americans. While they are more likely than younger people to have some level of savings, older people 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.
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 to save for retirement. One way to help people pay off this debt is to allow employers to provide debt repayment assistance as a tax-free benefit. One way to achieve this objective at the federal level is for Congress to expand section 127 of the IRC on Educational Assistance Programs to support student loan-repayment aid as a tax-free benefit treated the same as tuition assistance.
OTHER SAVINGS APPROACHES: Policy
Consumers should have access to a range of safe, reliable, affordable, and customizable emergency and short-term savings options, including through payroll deduction or direct debit.
Policymakers should eliminate administrative and policy barriers to employers offering employees access to automatic enrollment into multiple savings accounts for both retirement and non-retirement purposes.
States should change their laws to allow banks, credit unions, and other financial institutions to offer prize-linked savings opportunities.
Repayment of student loans
Policymakers should allow employers to provide student loan-repayment aid as a tax-free benefit (see also Chapter 11, Financial Services and Consumer Products - Student Loans for Higher Education).