Building Emergency Savings Through Employer-Sponsored Rainy-day Savings Accounts
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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.
Document Object Identifier (DOI): 10.3386/w26498
Published: Building Emergency Savings through Employer-Sponsored Rainy-Day Savings Accounts, John Beshears, James J. Choi, J. Mark Iwry, David C. John, David Laibson, Brigitte C. Madrian. in Tax Policy and the Economy, Volume 34, Moffitt. 2020