The Savings Dilemma: Preparing for Retirement While Navigating Emergencies
Jane is facing a dilemma. Her car broke down, and she is debating how to pay for repairs. As a waitress with two children, she struggles to pay the bills and hasn't been able to set aside enough money in her emergency fund. One of her options is borrowing money from her brother, but she still hasn't paid off the last loan he gave her. On the other hand, she doesn't want to resort to another payday loan with exorbitant fees she can't afford. Needless to say, the plan she came up with last month to begin saving for retirement is put on the back burner.
Jane is among the 40% of American households that are liquid asset poor, meaning they do not have enough savings to live at the poverty level for three months in case of a loss of income. This lack of emergency savings is especially problematic for lower-income families, who cannot weather financial shocks in the short term or set aside money for future goals.
The good news is that policymakers are proposing legislation that would help people like Jane save for their short-term and long-term needs. This week, Prosperity Now released an updated policy brief, Helping Families Save to Withstand Emergencies, which looks at how tax time and the workplace present opportunities for lower-income households to build savings.
To help amplify this critical issue and policy solutions around it, on May 28, Prosperity Now held the Delaware Saves 2019 event with Senator Chris Coons (D-DE) in Wilmington, DE to raise support for one of these pieces of legislation, the Saving for the Future Act (S. 1053 and H.R. 2120).
Introduced in April by Sens. Coons and Amy Klobuchar (D-MN), as well as Reps. Scott Peters (D-CA-52), Lucy McBath (D-GA-6) and Lisa Blunt Rochester (D-DE-AL), the bill encourages both short- and long-term savings by calling on employers to provide workplace-based savings options to their employees. Since retirement savings programs are built into many employers' benefits offerings, there is already an infrastructure in the workplace to encourage saving for emergencies as well. The bill's provisions include a combination of employer contributions, automatic enrollment and access to short-term savings accounts, which would help workers save for both their immediate needs and their future. This legislation coincides with the work that Prosperity Now and Prudential Financial are doing to help workers save for a rainy day alongside retirement.
At Delaware Saves 2019, Sen. Coons highlighted the importance of saving for now and for later, and how the Saving for the Future Act can make this easier for workers. "It would be a new ground rule for our economy," Sen. Coons remarked. "Why shouldn't we have employer-provided savings accounts that make saving for the future automatic, affordable, flexible and individual?"
Also attending was Delaware State Treasurer Colleen Davis, who spoke about savings solutions for Delaware, emphasizing that saving should be accessible to all. "It shouldn't matter where you come from, who your parents are, or the color of your skin. Everyone should have access to a stable financial future," she said. Lillian Singh, Vice President of Racial Wealth Equity at Prosperity Now, spoke to the problem of racial economic inequality in Wilmington, DE, which is one of the cities participating in the Racial Wealth Divide Initiative's Building High Impact Nonprofits of Color project. Finally, local employers in Wilmington joined a panel discussion, moderated by Prosperity Now's Vice President of Policy and Research David Newville, to talk about their role in building the financial security of their employees.
In addition to the workplace, tax time is another strategic opportunity for lower-income families to build savings. Tax refunds often account for a significant percentage of these families' annual income, especially among those who receive the Earned Income Tax Credit (EITC). This lump-sum payment gives recipients a financial cushion at tax time, which may be the only time in the year when they have extra money to set aside.
The bipartisan Refund to Rainy Day Savings Act (S. 1018 and H.R. 2112), introduced by Sens. Cory Booker (D-NJ), Tom Cotton (R-AR), Doug Jones (D-AL) and Todd Young (R-IN), as well as Reps. Bonnie Watson Coleman (D-NJ-12) and French Hill (R-AR-2), leverages tax refunds like the EITC to help families save for emergencies. The bill would allow tax filers to defer 20% of their tax refund, which would accumulate interest for six months before being returned to the filer. This way, a family would have savings to fall back on throughout the year, instead of just at tax time.
Sens. Booker, Cotton, Jones and Young have also proposed the Strengthening Financial Security through Short-Term Savings Plans Act (S. 1019), which would make it easier for employers to offer emergency savings accounts to their workers, separately from any retirement accounts being offered.
Learn more about how this legislation can help lower-income families save for emergencies by reading our policy brief. To help us move these bills forward, urge your legislators to co-sponsor the Saving for the Future Act and the Refund to Rainy Day Savings Act. Finally, use our Savings Toolkit to spread the word and advocate for improving low-income families' financial wellbeing. All households, including Jane’s, need solutions to save in the short- and long-terms. With your support, we can help families in this country build savings and, ultimately, a better future.