In recent decades, families have shown a steady decline in their ability to weather a financial emergency. A study released by the National Bureau of Economic Research in 2011 estimated that about one-quarter of Americans lack the capacity to cover an unexpected expense by coming up with $2,000 within 30 days. An additional 19 percent would do so by relying, at least in part, on pawning or selling possessions or taking payday loans.
Although the personal savings rate has increased recently, it is not clear whether this apparent return to thrift will endure beyond the present economic downturn. Meanwhile, research shows that consumers, particularly lower-wage workers, understand the importance of saving for emergency expenses. However, many lack access to savings plans or structures to enable them to begin saving. Others may worry about high banking fees or the safety of savings deposits. Or they simply fail to overcome the inertia that keeps them from entering a bank lobby and choosing from an array of savings products.
The workplace is a promising asset-building delivery channel that has been underutilized to facilitate savings for non-restricted, emergency use. The AutoSave model has the potential to change this. AutoSave is a savings mechanism that automatically diverts, through payroll deduction, a small amount of an employee’s post-tax wages into a savings account. A pilot of this model is now testing varied approaches to savings plan enrollment that leverage the power of default choices — simplified options with certain decisions already made on behalf of the employee, such as the type of savings account product and the suggested saving level. AutoSave streamlines account opening, minimizing the need for consumer decision-making or paperwork. Once initiated, savings deposits are made automatically by the employer each pay period, until the employee decides to stop or separates from the employer. Importantly, the pilot is also exploring (and will possibly test) the feasibility of implementing a design that goes one step further in making a default choice — to automatically enroll employees in the savings plan unless they opt out.
Both of these approaches to enrollment — automatic (“opt-out”) enrollment and streamlined, “opt-in” enrollment — have shown great promise to increase worker participation in employer-sponsored savings plans. However, most research in this area has been limited to large firms. Moreover, it suggests that there is much yet to learn about how best to facilitate and encourage lower-income workers to save. AutoSave’s experience is illustrating how workers in varied workplace settings, and at varied levels of earnings, react to default saving mechanisms.
Unlike most existing workplace saving programs, which focus on building retirement assets, AutoSave savings are intended to be fully liquid and available both to cover short-term needs and, potentially, to increase attachment to mainstream financial services or to serve as building blocks to longer-term asset accumulation. Although federal and state governments support a variety of programs and policies to encourage saving, most are focused on long-term goals, such as retirement, and have consequent restrictions on use and penalties for withdrawals. In addition, lower-wage workers receive little or no benefit from incentives to save that are embedded in the tax code. Currently no systematic savings program or policy exists to intentionally encourage non-restricted saving for the short term.
To address low levels of savings and retirement preparedness among American workers, the Automatic IRA Act (a bill reintroduced in Congress in September 2011) has proposed the widespread use of workplace-based, automatic enrollment of workers into individual retirement accounts. This approach has been met with support across the ideological spectrum. Although it targets retirement saving rather than short-term saving, Automatic IRA has key elements in common with AutoSave. Both initiatives would focus on making it easier for individuals to begin saving. As payroll-based savings plans, they maximize efficiency by relying on an existing infrastructure — direct deposit — to deliver the benefit. And to accommodate changes in household financial conditions, both plans allow participants to adjust their contribution level or opt out at any time. Given these similarities, the AutoSave pilot may provide insights into how Automatic IRA might perform among low- and moderate-income workers, in a variety of workplace sizes and settings.