Congress moves to boost rainy day funds for workers

Congress recently passed a massive spending bill to keep the government funded until the fall. But folded into the $1.7 trillion package are new measures to help workers build up their rainy day funds.

For more on what the new guidelines entail, Marketplace’s Nova Safo caught up with senior economics contributor Chris Farrell. The following is an edited transcript of their conversation.

Nova Safo: So this legislation made it easier for employers to help their workers save for unexpected financial setbacks, right?

Chris Farrell: Yes, and financial experts, you’ve heard this, you know, you should be saving what, three to six months’ worth of expenses for emergencies? But that’s just unrealistic for many people. When faced with a hypothetical expense of $400, a Federal Reserve survey in 2021 found that 32% of adults said they would have to pay the bill by borrowing or selling something. And early in the year, there was a Consumer Financial Protection Bureau study, and it found that one-quarter of consumers have no savings set aside for emergencies. Thirty-seven percent have less than a month of income saved for emergencies.

Safo: So what does the omnibus bill that passed last week, what does that do to address the fact that so many Americans have just too little savings?

Farrell: So here’s the key shift in the legislation: It makes it easier for employers to automatically enroll employees in an emergency savings account that’s associated with their 401(k) plan. So employees can save as much as $2,500 in the account with automatic payroll deduction. And like a Roth [IRA], these contributions are with after-tax dollars, but employees could withdraw money up to four times a year without penalty, tax or fees.

Safo: And do you think that this new emergency savings account will make a difference, not only in giving Americans more financial cushioning, but also helping to save for retirement?

Farrell: I really do because, one, it’s going to encourage people not to tap into their retirement savings plans. And we’ve had all these ad hoc legislative initiatives during downturns, where you can get at that money, because it’s really the only pot of savings most people have. So this now will say, “Look, you have an emergency savings account here that you can draw on. And employees want this. There was an AARP survey from several years ago, it was employees 25 to 64 years old, and they found that more than 7 in 10 said that they would participate in the payroll deduction rainy day savings program if their employer offered one. And then probably the most heartening news is there have been a number of pilot programs, such as one at UPS, and workers did build up their savings in these accounts.

Safo: So lawmakers have done their part, but employers will still have to choose to make the savings accounts available to their employees, right?

Farrell: Yes, and I have my fingers crossed that they’re going to do that because employers have learned over the past, what, dozen-plus years, that employees, you know, they’ve become financially stressed, productivity falters, absenteeism goes up, you know, during hard economic times. Now, the real public policy concern is like half the workforce doesn’t have access to a 401(k) plan. But for those workers who do, you know, paying for an emergency, saving for emergencies, should become much more practical with automatic payroll deduction.