Thomas Barwick | Digital Television | beautiful pictures
Many families struggle to cash in when faced with an unexpected $400 expense.
A lack of emergency savings can force them to borrow money at high interest rates to pay for unexpected expenses, putting their financial security at risk.
Now Congress has an opportunity to address that problem by paving the way for new emergency savings plans during the lame duck session.
Three emergency savings proposals can be put into one legal package called Secure 2.0is set to amplify changes to the pension system introduced by the Privacy Act in 2019.
“We are at the cusp of a dramatic shift in the way people save for emergencies in this country,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center. , thanks to public policy and private sector innovation”. organized by the think tank in Washington, DC.
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The group discussion coincides with an open letter from Action by the Bipartisan Policy Center with 40 organizations to Senate Majority Leader Chuck Schumer, DN.Y., and Minority Leader Mitch McConnell, R-Ky., as well as House Speaker Nancy Pelosi , D-Calif., and Minority Leader Kevin McCarthy , R-Calif.
The letter calls for the inclusion of three bills that would boost emergency savings in the pending retirement package.
“We firmly believe that emergency savings is consistent with the goals of the U.S. retirement system and will help strengthen the financial resilience of American households,” they wrote.
Why emergency savings fall
Anti-eviction banners hang on a rent-controlled building in Washington, DC, on August 9, 2020.
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The Covid-19 pandemic is a stress test for many Americans’ finances.
As parts of the economy shut down, many individuals and families find their incomes reduced or lost altogether.
The federal government stepped in and sent an unprecedented amount of aid through three rounds of stimulus checks, a boost in federal unemployment benefits, and a direct monthly child tax credit payment to parents. and other policies.
Still, the pandemic has caused some workers to withdraw money from a 401(k) or other retirement savings account, putting their long-term financial future at risk.
Those who have had at least $1,000 in emergency savings According to the Aspen Institute, at the height of the pandemic, they were half as likely to withdraw money from their retirement savings accounts.
“When people face that crisis, you need that liquidity savings to protect your long-term investments,” said Tim Shaw, deputy director of policy at the Aspen Financial Security Program. yourself and make sure you have a secure retirement and build wealth.” Policy Center Dashboard.
Covid relief measures have helped boost the proportion of families who can cover the unexpected $400 expense with cash or an equivalent method of payment. 68% in 2021up 4 percentage points from 2020. It also marks the highest level since the Federal Reserve began the survey in 2013.
Still, with 1 in 3 households needing a $400 emergency loan, the amount is still “too much,” Shaw noted.
How 3 Proposals Can Encourage Savings
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Advocates are hoping three proposals that could help encourage emergency savings will be included in Secure 2.0.
That includes two bills proposed by Senators Cory Booker, DN.J., and Todd Young, R-Ind., as well as a third bill proposed by Senators James Lankford, R-Okla., and Michael Bennet, created by D-Colorado.
A proposal by Booker and Young would allow employers to offer workers emergency savings accounts in addition to their retirement savings accounts. Employees will be able to automatically set aside up to $2,500 that they can use at any time during an emergency.
The second proposal from Booker and Young would allow for separate stand-alone plans outside of retirement accounts, which would be “really important” for employees who don’t currently have a retirement plan through their employer. their movements, Akabas noted.
The third plan, the Lankford-Bennet plan, would allow workers to withdraw up to $1,000 from their retirement accounts with no penalties in the event of an emergency. Such withdrawals will be allowed only once per year; Additional contributions will be required before making another withdrawal.
Chantel Sheaks, executive director of retirement policy at the American Chamber of Commerce, said she was “dazed” that all three proposals would be included in Secure 2.0 and the legislation would pass.
“From an employer’s point of view, we need choice,” said Sheaks.
She notes that what may work for one employer may not work for another. Sheaks said the three proposals would allow for more options, including the ability to encourage employers who currently don’t have retirement plans to think about adopting them.
Furthermore, since difficult withdrawals can reduce workers’ retirement security, these emergency savings options can help stave off those obstacles to wealth building.
“People have urgent needs these days, and we can’t forget those urgent needs,” Sheaks said. “We need to find a way to balance the needs of today with the needs of tomorrow.”
