The Saving for the Future Act Could Be a Game Changer for Retirement and Emergency Savings
In response to the harsh economic realities facing so many working families today, earlier this morning Senators Chris Coons (D-DE) and Amy Klobuchar (D-MN) and Representatives Scott Peters (D-CA-52), Lucy McBath (D-GA-6) and Lisa Blunt Rochester (D-DE-AL) introduced the Saving for the Future Act, which would require all working Americans to have a minimum amount of savings. (See Prosperity Now’s press release on the bill.) It does this by making savings through the workplace a universal feature of employment in America. The Saving for the Future Act would have a significant impact on two kinds of savings: retirement and emergency savings.
About a third of the U.S. workforce lacks access to a retirement plan at work. Among those who are eligible to participate in a 401(k) plan, about one fifth do not participate. While our tax code today provides the majority of retirement benefits to the wealthy, this bill would be a first step to allocating those benefits more equitably with low- and middle-income families.
Too many Americans also lack the savings needed to ensure financial security. Forty percent of Americans live in liquid asset poverty, meaning that if these households lose their income due to a death in the family, a job loss, a hospitalization or a host of many other disruptions, they do not have enough savings to live at the poverty level for three months. Liquid asset poverty is even more prevalent in Black and Latino households, 63% of which are liquid asset poor. This lack of short-term savings makes it harder for working families to handle financial emergencies and prevents them from building savings for their long-term goals, such as buying a home or having a secure retirement.
By building upon proven models of workplace retirement savings, such as 401(k)s, defined benefit pensions and emerging state-backed savings plans, the Saving for the Future Act calls on employers to contribute 50 cents for every hour worked by their employees to an UP-Retirement account. This rises to 60 cents after two years and then rises with wage growth. Workers would have a minimum amount of savings available to them, regardless of whether they contribute.
The legislation also calls for workers to be automatically opted in to the program at a contribution of four percent of their own earnings (workers can opt out of the program if they would like to). By making enrollment an automatic feature, the Saving for the Future Act has the potential to greatly boost participation in retirement plans. For example, one study shows that automatic enrollment in retirement programs can increase participation rates from 40% to over 90%. In addition to automatic enrollment, the Saving for the Future Act also increases worker’s contributions each year by half a percentage point, going up to 10%. Upon retirement, workers may use their savings as monthly income or collect a lump sum all at once.
The legislation also addresses unique challenges that smaller businesses face in providing greater retirement support to their workers. Businesses with fewer than 100 workers can make contributions through payroll into accounts that are run by the federal government. These UP-Retirement accounts will be portable, low-fee and worker-owned. Businesses can receive a tax credit for a portion of their minimum contributions to up to 20 workers, starting at 75% and phasing down to 25%. At the same time, employers with 10 or fewer workers can opt out of employer contributions. However, if the businesses decide to engage, their workers can access the accounts and receive a direct, individual credit for their savings.
To build emergency savings, the first $2,500 in savings a worker accumulates through the legislation goes to a government-run UP-Savings account, a safely-invested, accessible account designed for short- and medium-term savings. When the UP-Savings account is at its maximum of $2,500, additional contributions then go to a worker’s retirement fund and help the employee save for their future. Given that recent in-depth interviews of young, low-income workers conducted by Prosperity Now found that other financial needs became a significant barrier to achieving a secure retirement, we welcome this emergency savings account to help workers save for now, as a means to save for later. We discuss this further in our recent report, Saving for Now & Saving for Later: Rainy Day Savings Accounts to Boost Low-Wage Workers’ Financial Security.
Savings are not only for the benefit of workers. Personal finance issues can distract workers from doing their jobs, inhibiting their productivity. PwC reports that a quarter of employees say that personal finance issues have been a distraction while working, and 18% of workers say that productivity at work has been affected by financial worries. Outside of time spent worrying, these personal finance issues can also mean that employees devote more company hours towards solving these problems instead of working. Eleven percent of workers also say they have missed work due to financial worries. Savings can play a key role in improving financial well-being, which can lead to decreased stress over financial issues.
The workplace can offer the perfect structure to help working families save for a range of economic needs, but only if workers are given the right supports to do so. The public-private collaboration brought about through the Saving for the Future Act means that working Americans can have a better shot at building their financial security in both the short- and long-terms. With the federally-provided UP-Savings account, a working family can stay financially intact through an unexpected car repair, a reduction in or loss of public benefits and a job loss or reduced work hours. Couple that with the automatic enrollment feature, scaled savings and employer contributions towards retirement savings, and workers will be in a better place to spend their golden years in comfort.
With so many households living on the financial edge, it is critical to help them save for both inevitable financial emergencies and their future. Creating this wealth-building support in the workplace will play a key role in reducing wealth inequality, especially in households of color.
To support the Saving for the Future Act, ask your legislators to co-sponsor this bill and use our Savings Toolkit to spread key messages. With your help, we can change the landscape of savings for the better.