Emergency savings is vital to family financial well-being and the broader economy. With 37% of Americans unable to manage a $400 emergency with savings, and lower-income households, particularly Black, and female-led households making under 60K per year disproportionately affected, lack of emergency savings is an increasingly urgent issue.
Financial stress caused by the lack of emergency savings has an impact on individuals, communities and the economy. Chronic distress associated with worrying about short-term finances is disruptive for employees and employers alike, resulting in lower productivity at work, which costs companies up to $250 billion per year. Therefore, there is an ethical and business imperative to act.
Public policy has a pivotal role to play in reducing barriers, increasing access, and incentivizing the private sector to address the emergency savings crisis. The private sector can deliver high quality emergency savings accounts to tens of millions through the employer channel. Federal and state governments can set the stage for employers by creating public policy that enables innovation, incentivizes saving, and expands coverage.
Public policy already shapes the way people save for retirement, healthcare, and education, among others. Emergency savings, however, has largely not been addressed through public policy. That may be one reason the emergency savings crisis remains with us: we don’t have the systems in place to support it. Unlike retirement, health, and education savings, for example, there are no tax incentives to save for emergencies. To make significant progress on our country’s emergency savings crisis, the government needs to play a critical role in enabling, building, and maintaining systems that support emergency savings for all.
How can public policy for emergency savings take shape?
Commonwealth’s work with the private sector, as well as research and reports from others in the field, has shown the importance of the employer channel as a primary delivery mechanism for emergency savings.
When a worker receives their paycheck, it should be as easy as possible for them to save for emergencies.
With a focus on the employer channel, our vision is this: When a worker receives their paycheck, it should be as easy as possible for them to save for emergencies.
We propose three pillars that are essential to realizing this vision and shoring up an equitable system for supporting emergency savings. In partnership with the private sector, policymakers should:
- Enable innovation to make saving easier
- Incentivize saving to make it common in the workplace
- Expand coverage to whose who need it most
Enable innovation
Commonwealth and our partners have and will continue to identify and develop solutions to policy barriers and regulatory grey areas that inhibit responsible innovation around emergency savings through the employer channel. Here are two areas where policymakers can enable innovation by providing clarity:
- Make automatic enrollment into emergency savings widely available. As soon as a worker starts a job, they should have access to a high-quality emergency savings product—and then automatic saving should be easily accessible. Moving forward, we will work with relevant government agencies to continue to drive adoption of automatic saving through both out-of-plan (separate from a retirement account) and in-plan (connected to a retirement account) options.
Commonwealth already began to address one barrier for out-of-plan options: The Consumer Financial Protection Bureau approved our Autosave CAST application. For employers and financial institutions willing to take the lead, an Autosave pilot is possible. To achieve wider adoption, however, we’ll need to address varying and sometimes restrictive state payroll laws. - Add emergency savings features to retirement plans. Given the existing reach and established relationships between employers and recordkeepers, policymakers are well poised to enable better ways to connect emergency savings and retirement savings, and encourage employers to use effective behavioral mechanisms to drive engagement.
To be clear: linking emergency savings to retirement savings can currently be done through both out-of-plan and in-plan options, and there are already several solutions in market. Policy clarity, however, could help drive further innovation. Continuing to find ways to connect emergency savings to retirement savings will be critical to increase access to emergency savings while preserving retirement savings.
Incentivize emergency savings
As evidenced by retirement and health savings, the government can effectively incentivize savings by offering tax breaks to both employers and employees. Unfortunately, many of those incentives often favor people with higher incomes. For emergency savings, we need to research and explore tax changes that would be economically feasible and equitable, driving emergency savings for LMI people, particularly women and people of color.
Expand coverage
While the traditional employer-based channel has tremendous reach, we need a strategy to extend high-quality emergency savings opportunities for all workers. Many organizations have already articulated coverage gaps for retirement savings, which have implications for emergency savings gaps. Some emergency savings gaps we will focus on include:
- Employer does not offer a 401k/403b with a recordkeeper
- Employer’s recordkeeper has no effective emergency savings option
- Employee is a non-traditional worker
People of color and women disproportionately fall in those gaps, emphasizing the importance of this pillar for advancing a truly equitable emergency savings ecosystem.
Next steps
Using these pillars as guides, Commonwealth will continue to work to support public policy that makes saving for emergencies as easy as possible for every American worker.
We recognize income disparity—disproportionately impacting Black, Latinx, and female-led households as well as longstanding systemic racism and gender discrimination—create barriers that make saving more difficult. The policy solutions described here can move us closer to a national emergency savings infrastructure that serves everyone, and in doing so disproportionately benefits Black, Latinx and female households.
To adequately address the emergency savings crisis, we need bold action from the public, private and non-profit sectors. It requires a multi-sector and multi-partner approach. If you are a workplace platform provider, policymaker, employer, and/or fintech innovator, please contact Jason Ewas at jewas@buildcommonwealth.org to explore how you can learn more and work with us to make progress on making emergency savings possible for all.
About BlackRock’s Emergency Savings Initiative
BlackRock announced a $50 million philanthropic commitment to help millions of people living on low to moderate incomes gain access to and increase usage of proven savings strategies and tools – ultimately helping them establish an important safety net. The size and scale of the savings problem requires the knowledge and expertise of established industry experts that are recognized leaders in savings research and interventions on an individual and corporate level. Led by its Social Impact team, BlackRock is partnering with innovative industry experts Common Cents Lab, Commonwealth, and the Financial Health Network to give the initiative a comprehensive and multilayered approach to address the savings crisis.
