The Workplace and Rainy Day Savings

Too many households are one unplanned expense away from financial ruin. At least one in four Americans are in this precarious situation and classified as asset poor, meaning they lack sufficient financial resources (savings, home equity, or other asset) to subsist for three months if their current income were suspended.

For workers experiencing “too much month at the end of the paycheck,” to borrow Peter Skillern’s phrasing, without a rainy-day fund to tap for the unplanned expense, individuals have few options other than to take on a high cost loan and amass unsecured debt which can undermine a household’s financial stability in the short, medium and long-term.

According to a 2005 Consumer Federation of America survey, financial worry compromises productivity on the job, affecting an estimated 10 million working women. Topping the list of unanticipated expenses that cause personal financial stress were motor vehicle transportation and health care related, which combined with all types of emergency costs, totaled $2,000 yearly.

It’s not easy being thrifty

Heavy marketing of credit cards urges us to spend now and pay later. Mailboxes are replete with credit offerings, not savings opportunities that urge deferred consumption or suggest that even small deposits can make a difference. And individuals seeking public assistance receive mixed messages by the asset limits rules that punish the acquisition of a savings account or other wealth-building tool (including even a low-value car!). As a nation, we’re moving in an anti-thrift direction; to change course, small adjustments to existing structures could ease and encourage saving.

Saving determinants

Structures, institutional constructs, incentives and simplified choices all facilitate saving. For example, tax preferred retirement and education investment accounts and the home mortgage interest deduction incent massive saving, yet they overwhelmingly accrue to middle and upper income earners. Several experiments have also shown that the presence and level of a financial match and a favorable rate of return increases participation in savings products and plans. And though lower-income households save in smaller amounts and may lack access to comparable savings opportunity by virtue of their job type, they can and do save.

A proposal to make it easy for people to save

Conceptualized by our colleague, Reid Cramer, AutoSave is an automatic payroll deduction diverted into a flexible (i.e., non-tax-advantaged) savings product.

As the name suggests, the savings occurs automatically on payday, with a small share (say, 2 percent) of post-tax wages and salary directly deposited into a savings account, a parallel system to one’s payroll direct deposit. At any time, the employee could increase, decrease or end the automatic transfer.

By using a default, savings occurs before the worker has the temptation to spend extra income and before the overwhelming decision-making process of what, when, and where to save kicks in. Asset-building theory and real-world experiences indicate that individuals maintain the choice into which they are defaulted. This is particularly true where employers automatically enroll employees in retirement plans.

But low-cost, scaleable opportunities to increase non-retirement savings in the workplace are few and far between (with SMaRT one of the notable exceptions).

From proposal to pilot

We are embarking on the design of a multi-year pilot to rigorously test this concept and build evidence for an informed savings policy.

Though we have a strong base from which to start, questions remain. Will access to a universal savings platform through the workplace have positive outcomes for the employee and their employer? Will a low-cost, accessible savings platform improve household financial stability? What effect will a non-retirement savings account have on retirement planning, debt servicing, and use of payday and other high cost lending sources? We will explore answers to these questions and others.

We invite employers, financial services providers, employer intermediaries, unions, employee associations, and others to join the discussion and we look forward to your input in this exciting initiative.