Keywords

financial vulnerability, retirement savings leakage, emergency savings accounts

Abstract

Many Americans live paycheck to paycheck, carry revolving credit balances, and have little liquidity to absorb financial shocks. One consequence of this financial vulnerability is that many individuals use a portion of their retirement savings during their working years. For every $1 that flows into 401(k)s and similar accounts, between 30¢ and 40¢ leaks out before retirement (Argento, Bryant, and Sabelhaus 2015). We explore the practical considerations and challenges associated with helping households accumulate liquid savings that can be deployed when urgent pre-retirement needs arise. Automatically enrolling workers into an employer-sponsored “rainy- day” or “emergency” savings account—terms that we use interchangeably in this paper—funded by payroll deduction could be a cost-effective way to achieve this goal. We explore three specific implementation options: (a) after-tax employee 401(k) accounts; (b) deemed Roth IRAs under a 401(k) plan; and (c) depository institution accounts. We evaluate the pros and cons of each approach and conclude that all three approaches merit exploration and field testing.

Original Publication Citation

“Building Emergency Savings through Employer-Sponsored Rainy-Day Savings Accounts.” In Robert A. Moffit, editor, Tax Policy and the Economy, Vol. 34, Cambridge, MA: MIT Press, pp. 43-90 (with John Beshears, James J. Choi, Mark Iwry, David John and David Laibson). A longer and more expansive version of this paper is available under the same title as NBER Working Paper No. 26498 https://www.nber.org/papers/w26498

Document Type

Peer-Reviewed Article

Publication Date

2020

Publisher

Tax Policy and the Economy

Language

English

College

Marriott School of Business

Department

Finance

University Standing at Time of Publication

Full Professor

Download

Share

COinS