Saving

The Workplace and Rainy Day Savings

Alejandra Lopez-Fernandini — Tue, 27 May 2008 15:50:00 -0400

Too many households are one unplanned expense away from financial ruin. At least one in four Americans are in this precarious situation and classified as asset poor, meaning they lack sufficient financial resources (savings, home equity, or other asset) to subsist for three months if their current income were suspended.

For workers experiencing "too much month at the end of the paycheck," to borrow Peter Skillern's phrasing, without a rainy-day fund to tap for the unplanned expense, individuals have few options other than to take on a high cost loan and amass unsecured debt which can undermine a household's financial stability in the short, medium and long-term.

According to a 2005 Consumer Federation of America survey, financial worry compromises productivity on the job, affecting an estimated 10 million working women. Topping the list of unanticipated expenses that cause personal financial stress were motor vehicle transportation and health care related, which combined with all types of emergency costs, totaled $2,000 yearly.

It's not easy being thrifty

Heavy marketing of credit cards urges us to spend now and pay later. Mailboxes are replete with credit offerings, not savings opportunities that urge deferred consumption or suggest that even small deposits can make a difference. And individuals seeking public assistance receive mixed messages by the asset limits rules that punish the acquisition of a savings account or other wealth-building tool (including even a low-value car!). As a nation, we're moving in an anti-thrift direction; to change course, small adjustments to existing structures could ease and encourage saving.

Saving determinants

Structures, institutional constructs, incentives and simplified choices all facilitate saving. For example, tax preferred retirement and education investment accounts and the home mortgage interest deduction incent massive saving, yet they overwhelmingly accrue to middle and upper income earners. Several experiments have also shown that the presence and level of a financial match and a favorable rate of return increases participation in savings products and plans. And though lower-income households save in smaller amounts and may lack access to comparable savings opportunity by virtue of their job type, they can and do save.

A proposal to make it easy for people to save

Conceptualized by our colleague, Reid Cramer, AutoSave is an automatic payroll deduction diverted into a flexible (i.e., non-tax-advantaged) savings product.

As the name suggests, the savings occurs automatically on payday, with a small share (say, 2 percent) of post-tax wages and salary directly deposited into a savings account, a parallel system to one's payroll direct deposit. At any time, the employee could increase, decrease or end the automatic transfer.

By using a default, savings occurs before the worker has the temptation to spend extra income and before the overwhelming decision-making process of what, when, and where to save kicks in. Asset-building theory and real-world experiences indicate that individuals maintain the choice into which they are defaulted. This is particularly true where employers automatically enroll employees in retirement plans.

But low-cost, scaleable opportunities to increase non-retirement savings in the workplace are few and far between (with SMaRT one of the notable exceptions).

From proposal to pilot

We are embarking on the design of a multi-year pilot to rigorously test this concept and build evidence for an informed savings policy.

Though we have a strong base from which to start, questions remain. Will access to a universal savings platform through the workplace have positive outcomes for the employee and their employer? Will a low-cost, accessible savings platform improve household financial stability? What effect will a non-retirement savings account have on retirement planning, debt servicing, and use of payday and other high cost lending sources? We will explore answers to these questions and others.

We invite employers, financial services providers, employer intermediaries, unions, employee associations, and others to join the discussion and we look forward to your input in this exciting initiative.

A Dollars and Sense Rationale to Deliver Accounts at Tax Time

Melissa Koide — Mon, 28 Apr 2008 13:34:00 -0400

Each year the U.S. Treasury Department issues over one-hundred million refunds worth billions of dollars to individual tax filers.

Almost half of all refunds are issued via a paper check, with the majority of those checks being mailed to lower-income households. This presents a scaleable opportunity to provide these households with a low-cost transaction and savings account on the tax form.

IRS data show that of the 60 million federal tax refunds that were issued via a paper check in 2005, almost half were mailed to households earning $30,000 or less. These are the very households who typically lack access to reasonably-priced financial services and who are most likely to pay a disproportionate amount of their income to conduct routine financial transactions. They are also less likely to have adequate savings to cover emergency expenses like car repairs or unexpected medical bills, which often leads to payday lenders and other expensive sources of credit.

These households do, however, receive on average about $1,700 in federal tax refunds. And when examined in the aggregate, almost $50 billion is annually refunded to households with AGIs of $30,000 or less, via paper check.

The potential of those refunds as deposits creates a powerful case for financial institutions to make a low-cost transaction and savings product available to lower-income consumers.

And the millions of dollars in cost savings to the federal government in delivering these refunds electronically, combined with the policy objective of helping to "bank the underbanked," present a strong case for the federal government to provide tax filers with an option for such an account on the tax form.

Envisioned as a large-scale federal policy, the Assets and Transaction Account, or ATA, would be a prepaid account that would be delivered to tax filers who didn't direct deposit their refund into an existing account or elect to receive a paper check.

Financial institutions would issue the ATAs, which would be initially funded with tax refunds. Other deposits, including wages and salary and federal benefits, such as social security payments, could also be made into the accounts throughout the year. To facilitate savings, five percent of the tax filer's refund would be automatically deposited into a savings purse of the account. At a minimum, the ATA would be FDIC-insured, network-branded, and provide ATM access, POS capabilities, and web- and phone-based bill payment options, thus allowing the ATA-holder to use their account to conduct routine financial transactions and build some savings at a reasonable price.

By leveraging billions of dollars in annual tax refunds, there is enormous potential to deliver a financial product that benefits consumers, industry, and the government alike.

Saving Across America

Ellen Seidman — Thu, 24 Apr 2008 14:44:00 -0400

Last week I had the privilege of discussing asset building for lower income Americans in three very different settings: the annual Opportunity Economics Colloquium of the Hope Street Group, held at the Lansdowne Resort outside of Washington; an Assets Forum sponsored by the New America Foundation in the State Capitol in Sacramento, California; and with a group of financial services, social service and foundation representatives brought together by the City of Seattle. While the settings and audiences varied, the theme was the same: how to empower and encourage all Americans, particularly those who do not have funds either to cushion an economic setback or to invest to achieve economic security, to take sustainable first steps toward saving. Given the current financial crisis, one wishes these discussions had started ten years ago, but that same crisis makes it all the more important that they're happening now.

Our group at Hope Street, which included policy types and investment bankers and other private sector players, young and less young, from both coasts, was assigned the task of recommending policies that would be effective to increase to 50% the percentage of Americans who had savings to cover six months of operating expenses. In other words, unlike the usual Washington policy debate, this was not about pension and retirement savings, important as those are. We settled on a goal of about $10,000-recognizing that it was low, but to give us a target to shoot for-and focused on liquid assets, while recognizing that bankable non-liquid assets, such as a home, can sometimes serve the same purposes. While we didn't stick entirely to the task, in that at least one of our policy recommendations is a bet on the longer term, the policies we chose would all constitute effective steps toward the goal.

After four hours of robust discussion and debate, we settled on five top policy recommendations. These are: build a new generation of savers by seeding a savings account for every child-to become available at age 18-with $500 and, as in the United Kingdom, use the new account to enhance the financial literacy of the entire family; encourage greater competition in the consumer financial services sector-while recognizing the need for effective consumer protection-to increase innovation in products and services that serve the bottom half of the wealth distribution; encourage greater efforts in the workplace to provide easy, automatic paths to saving beyond retirement saving, and financial education about how to manage and grow those savings; revitalize the US Savings Bond program, which provides a totally safe, small denomination, non-account-based, modestly liquid vehicle for saving in small amounts; and stop punishing savings by substantially modifying the asset limits that discourage everyone from TANF recipients to applicants for Pell grants for higher education from saving. The Hope Street colloquium ended with presentation of these ideas to representatives of the three Presidential candidates.

In Sacramento, the focus was on financial literacy, both to build on and to build up momentum for the California Financial Literacy Initiative (AB 2123), introduced by Rules Committee Chair Ted Lieu and sponsored by California Controller John Chiang. We discussed the increased need for financial literacy in a world of enhanced individual responsibility for financial health, a younger and older population, and ever more complex financial products from a widening array of providers. The Financial Literacy Initiative is a platform on which the state and its partners can build both financial literacy resources and outreach. Already the California Library Literacy Services has indicated interest in adding financial literacy to its broader literacy initiative, potentially bringing this type of education into a trusted resource for adults in over 600 communities. A particularly innovative element of AB 2123 would start the process of establishing a Financial Literacy Corps to mobilize financial professionals and others to provide unbiased financial advice to low- and middle-income families who are now without this resource. New America Foundation is working on this concept on a national scale and it is exciting to see it begin to take shape in California.

Seattle and King County have been working on a series of asset-building initiatives, including a Bank on Seattle program. The participants in the asset-building coalition-city and county officials; social service agencies; banks, thrifts and credit unions; and the philanthropic sector-are focused on building pathways to enable people to better meet their financial needs. We spent our time discussing what was needed, the roles of all parties, examples of success and best practices, and what the literature tells us. Specific areas of concern were bringing people into bank accounts and linking those accounts to saving; effectively coordinating financial education with the opportunity to use what was being taught; small dollar loans; and the challenges of banking immigrants in both urban and rural settings. Participants were very interested in the Federal Deposit Insurance Corporation's small dollar loan pilot program, both for what the 30 bank participants in that program (none of them, unfortunately, in Washington State) will be trying and demonstrating and because the FDIC will be disseminating the learnings widely.

It is enormously exciting that the importance of building savings and assets-of establishing the underpinnings of financial stability-has gained such interest in such a variety of venues. It is even more exciting that people across the country, from all sectors, are working together to develop and implement long-term, sustainable strategies to make financial stability attainable for everyone.

Rebate Checks and Economic Stimulants -- Breaking the Spending Habit

Ray Boshara — Wed, 16 Apr 2008 13:00:00 -0400

Imagine giving a drug addict more drugs, a drunk another drink, or a smoker another cigarette. Well, that’s exactly what Congress and the President seem eager to do with our nation’s addiction to spending: give us quick and easy cash. That fix will feel good (Wow, nice iPhone!), boost our confidence and, the plan goes, stimulate our slumping economy.

That addiction is about to get another hit as the long-awaited rebate checks arrive in a few weeks. The widely held view, of course, is that more spending will boost our confidence and, thus, the economy. But a cloud will hang over our high because we know that more spending further postpones the inevitable, and makes even harder what we know we must do to restore our nation’s long-term health: We must start saving again.

Who needed to save when the booming housing and stock markets, combined with increasingly easy cash for homes and consumer goods, made us feel like there was a never ending supply of money? But then we burned through literally trillions of dollars of home equity, home values plummeted, credit markets collapsed, and now we’re dangerously dependent on Chinese investors and Sovereign Wealth Funds to keep us afloat.

The party’s over, and we’ve woken up with a terrible hangover and far more addicted to spending than we think – and we’ve got the debt to prove it. We’re spending an average of 14.5 percent of our annual income simply servicing debt – a 30 percent increase from 15 years ago. That’s money going down the drain – not being used to get to work, for child care, or to pay the heating bill – doing nothing for our economy. Mortgage debt and consumer debt have both doubled in just the last six years, according to Daniel Alpert of Westwood Capital. And David Rosenberg of Merrill Lynch finds that that there’s $6.5 trillion of private-sector debt the economy cannot absorb.

So, should we be surprised that one in seven families is dealing with a debt collector, that foreclosures are at Depression Era levels, and that more kids today see their parents file for bankruptcy than divorce? Seems like it’s time to get sober, come clean, and get our economic lives back in order.

And it’s time for Congress to add some savings incentives to their stimulus efforts. Yes, we know: Savings is the anti-stimulus. Fine. Stimulate the economy now, and let the savings incentives kick-in a year from now.

But don’t leave savings out: Show us that you, Congress, understand that the nation needs a large pool of savings for investment, and that families need savings to weather emergencies, pay for college and training, start a business, make a down payment on a home (the zero-down-payment days are gone), and build a nest-egg for retirement.

But won’t it be hard for Americans to start saving again? Yes, reducing our spending in order to save will be painful, but we’ve learned that the process of saving actually can and should be painless.

For starters, preaching about financial education or forming yet another financial literacy commission – as President Bush has just done – ain’t going to do the trick. Savings behavior, like most behaviors, can’t be changed by telling people what they should do; indeed, 80 percent of Americans already know they should be saving, according to the Consumer Federation of America. Instead, savings has to be on auto-pilot, something we actually don’t think much about.

How many Members of Congress wake up every day and say, How much should I save today? Very few. But they’re accumulating enormous amounts of savings because in their first week of work someone in HR signed them up for the Thrift Savings Plan – a structured savings plan that automatically deducts savings from their paycheck, matches it, and invests it. One – if any – decision was made to save, and they’ve got a million bucks waiting for them at retirement. It’s really that simple.

So, first, Congress needs to do for the American people what it’s doing for itself: get every American, ideally at birth, into an automatic savings plan. Several bi-partisan bills now in Congress embody this idea. Second, Congress should target savings plans and incentives to those with the greatest need to save and most likely to generate new savings: lower- and middle-income households. Finally, Congress needs to crack down on predatory lenders and abusive credit-card providers, who share the blame for our consumption-crazed, debt-fueled economy.

Americans are resilient. Eventually our hangover will recede, our economy will pick back up, and – if only by necessity – we’ll start saving again. Hopefully we’ll succeed and see a culture of savings replace our culture of debt. For goodness knows that when the next boom-followed-by-bust comes, as it surely will, we won’t get swept up again, addicted to spending and crippling debt again, and get caught with our pants down and our pockets empty when the lights go on.

Tax Time -- An Opportunity for Working Families to Build Assets

Karen Murrell — Tue, 15 Apr 2008 14:00:00 -0400

Although many people dread the April 15 deadline to file their taxes, for millions of working families, tax time represents a potential lucrative asset building opportunity. Families, who are eligible for the earned income and other tax credits, can receive a lump sum of several thousand dollars and there are a growing number of options to use this lump sum to build assets.
The Earned Income Tax Credit (EITC) represents the country's largest, most effective anti-poverty programs. Every year approximately 20 million workers claim about $30 billion through the program lifting five million of them above the poverty line. For many families, tax refunds are the single largest lump sum of cash received each year.

Many workers regard this lump sum as a forced savings strategy. The average income tax refund is approximately $2,000 and although many of these families need their refund to help pay for basic living expenses, the lump sum can also be used as an opportunity to save and build assets. The lump sum could be used to establish an emergency fund, to pay down consumer and other forms of debt, to fund the down payment of purchasing a home, or to build long-term savings.

It seems logical that tax time could be a powerful asset building opportunity, but most families have dedicated their tax refunds well before they receive them. Encouraging saving and asset building at tax time can be challenging; therefore, we need powerful products and initiatives that encourage savings at tax time.

Encouraging families to save part of their refund is a message that needs to be conveyed long before the day the person does their taxes and an easy mechanism for saving or investing needs to be in place. Over the last few years, there have been several efforts to develop mechanisms to help working families build assets including the ability to split their refund into different accounts, the promotion of saving bonds as an asset building option, and the development of a new product that enables working families to open accounts at tax time.

In the past, taxpayers who received a refund either had to deposit all of their refund into one account or receive a paper check. Now, the IRS allows taxpayers to split their refund into up to three different accounts enabling them to direct some money into an account for spending and direct the remainder into accounts to build savings.

Another strategy to help low income workers build assets at tax time is a pilot program to get taxpayers to purchase savings bonds. Doorways 2 Dreams (the D2D Fund) and their partners tested U.S. Savings Bonds as a saving strategy with encouraging results. In a study in tax season 2007, savings bonds were offered in 27 H&R Block offices. Over 300 tax clients bought nearly 500 savings bonds, with take up rates between 6.0% and 9.6%. Approximately 56% of bond purchasers reported no other savings and among those with other savings, 52% had less than $1,000 saved elsewhere.

The New America Foundation is launching a new idea that could help working families build assets by enabling them to open an account at tax time. The Assets and Transaction Account-or ATA-would allow tax refunds to be electronically deposited into individual ATA for tax filers who do not direct deposit their refund into another account or who do not opt out of the ATA. The refund would be bifurcated between a transaction and a savings account, with five percent automatically deposited into an interest bearing savings account. The New America Foundation is currently leading an effort to craft a federal policy proposal to deliver an ATA at tax time.

Split refunds, the promotion of savings bonds, and the ATA are examples of products and strategies being explored to help low income working families begin to build assets. These products provide mechanisms to make it easier and more convenient to use a portion of tax refunds for asset building opportunities and although we need more time to evaluate their impact, early findings are encouraging.

We need to further encourage families to take advantage of these opportunities. Providing financial education that helps families to understand the importance and impact of saving and that increases the awareness of these products is important and should be delivered well in advance of tax season. We also need to explore communication and messaging strategies that resonate well with working families in order to promote these asset building opportunities effectively. There are now a growing number of options to help working families to begin to save and build assets at tax time and our next challenge is to develop strategies to help more families utilize the opportunities so they begin to build assets and achieve financial stability.