Surveying Household Wealth: Part 1 – Precautionary Savings
Blog Post
June 18, 2012
This blog post is part one in a series analyzing the recently released Survey of Consumer Finances from the Federal Reserve. The SCF is a triennial survey of American families that offers insights into income, wealth, debt, and savings over time. Today’s post explores the importance of building precautionary savings and policy approaches to support families’ savings goals.
Americans identified the need to “save for a rainy day” as the top reason for saving their money in 2010. This is a departure from past surveys: the last three Surveys of Consumer Finances (in 2001, 2004, and 2007) showed that Americans’ top reason for saving was retirement. This historic shift makes a lot of sense in the context of other data presented by the SCF.
The SCF shows a dramatic decline in median net worth and median incomes between 2007 and 2010. With financial insecurity and unemployment levels on the rise, families responded by shifting their savings priorities toward precautionary savings. Financial insecurity was widespread and jobs previously thought of as stable were suddenly being cut. Thus, saving for retirement, while vitally important for a financially secure future, edged down as the top reason to save. Faced with job loss or a depressed economy overall, the importance of saving for retirement inched down families’ priority lists.
For many low-wage workers, these conditions weren’t anything new. Bouts of unemployment, underemployment, and job uncertainty have long been the experience for lower-income workers. This longstanding trend meant low-income households were particularly ill-equipped to weather the recession because they had so little discretionary income and meager (if any) assets to fall back on. Historically, U.S. federal policies have supported longer term savings goals, such as for retirement or homeownership in large part through the tax code. Federal investment in emergency and precautionary savings is noticeably lacking: our 2012 Assets Report notes that there are no federal policies in place to support families saving for emergencies.
Local initiatives have sprung up to fill this void. For example, beginning in 2008, the $aveNYC program began offering a match to low-income tax filers who opt to save part of their tax refund in different types of accounts. The city of New York wanted to see if an incentive structure would help low-income households set aside some money for savings and saw promising results. In 2011, $aveNYC grew to be $aveUSA and added three new cities. The model focuses much-needed resources toward low-income earners and simultaneously recognizes the diversity of savings needs people have.
The Saver’s Bonus is a policy proposal that would bring the $aveNYC/$aveUSA model to scale by creating a match for eligible savings by low-income Americans annually through the tax filing process. With the Saver’s Bonus, low-income savers could be matched for contributions to a range of accounts, including IRAs, 401(k)s, 529 College Savings Plans, Coverdell Education Accounts, U.S. Savings Bonds and certificates of deposit. This model simultaneously supports people’s need to build assets in diverse ways, while giving them increased flexibility to prioritize their families’ individual savings needs. For a more in depth look at how this model and other tax-time savings interventions might work, check out Rachel Black and Reid Cramer’s recent paper, Incentivizing Savings at Tax Time: $aveNYC and the Saver’s Bonus.
The recent recession highlighted Americans’ economic vulnerability and the role assets could play in mitigating that vulnerability. Enhancing the individual efforts of savers through policy will help families create buffers that help them in the event of personal financial emergencies or broader economic downturns in the future. Low-income households, who regularly are confronted with economic insecurity, would benefit from these policies in both the short and long term. Federal policy efforts should focus attention on the need for precautionary savings and revamp savings mechanisms to be more equitable and inclusive of lower-income people.
Check back on The Ladder for part two in this series, which will examine Survey of Consumer Finances data on retirement account ownership.