The Federal Reserve rate hike this week stir up worries of a recession in the United States, which in the worst case could lead to mass layoffs and cash-strapped consumers. However, a congressional plan advanced this week that could better prepare American workers for such downturns.
If lawmakers are successful, American workers could automatically save for emergencies and retirement at the same time in years to come. Simply put: workers would be automatically enrolled in a program to set aside a small percentage of their paycheck for emergencies, with their company able to match those funds to a retirement plan like a 401(k).
“It’s really exciting because working people have real challenges when it comes to emergency savings,” Jamie Kalamarides, principal researcher at Prosperity Now, told Yahoo Finance Live this week.
Advocates have encouraged plans to help more Americans save for emergencies. An oft-cited 2018 study of the Federal Reserve found that 40% of adults, “if faced with an unexpected expense of $400, would not be able to cover it or would cover it by selling something or borrowing money”. More recent research highlighted the financial fragility of Americans. Many have to rush – and potentially retire or take out a payday loan – when hit by a curveball as simple as unexpected car repairs.
“We don’t force employers to offer this, but employers have a business case for offering these kinds of solutions,” adds Kalamarides, an advocate for the provisions. Options such as payday loans or credit card fees or access to retirement accounts can take their toll. on an employee’s long-term financial stability.
Like Suze Orman, the well-known financial advisor, featured in this week’s episode of “Yahoo Finance Influencers,” “If you don’t have an emergency fund for at least 12 months, you better start working on it now, because if you don’t, you could find yourself in serious trouble. “
‘Auto-registration is the key here’
Companies are of course now free to set up emergency savings accounts for their employees; in fact, Orman is funding a startup that does just that. However, advocates say turnouts will remain low without changes to the law.
“We think auto-registration is key here [to reach] consumers who need this pool of savings the most,” says Shai Akabas, director of economic policy at the Bipartisan Policy Center, which helped develop this offering.
The bill would allow employers to automatically set aside up to 3% of an employee’s salary for emergencies. Workers could opt out, but registration would be the default. Accounts would be capped at $2,500, with workers able to quickly access funds for an unexpected expense, without penalties.
“Giving people more options”
The layouts – sponsored by Sens. Cory Booker (D-NJ) and Todd Young (R-IN) – have been incorporated into a broader pension reform bill called RISE & SHINE Act during Senate hearing this week. This bill also encourages more pension plans and has been approved by the United States Chamber of Commerce and others.
Lawmakers are now aiming to wrap this bill into another bill – informally called SECURE 2.0which passed the House in March – and make it a single bill that could become law by the end of the year.
Another provision would also allow companies to contribute to employee retirement accounts when workers pay off their student loans. The two provisions could work together and “add up to some degree,” says Akabas. The key is to “give people more options for how they can accumulate an employer matching contribution”, he added.
Sen. Patty Murray (D-WA), chair of a key Senate committee, told this week’s hearing that the effort is coming to fruition “not a moment too soon” as families still struggle in the aftermath coronavirus disruptions.
Kalamarides hopes the effort will reach President Biden’s office by the end of the year with the emergency savings provisions intact to help Americans “overcome obstacles in their daily challenges, in their daily lives.” .
Ben Werschkul is a writer and producer for Yahoo Finance in Washington, DC.