The Retirement Savings Fiasco

For thousands of furloughed federal workers, the 16-day government shutdown wasn’t just a public display of Congressional dysfunction— it was the trigger of a personal financial crisis. According to the administrators of the Thrift Savings Plan (the federal version of the 401k), over 8,200 federal employees made hardship withdrawals from their retirement accounts during the shutdown.

But that statistic is paltry compared to the number of all Americans with a 401 (k)-like retirement plan that unexpectedly withdrew cash back in 2010: one in four.

Those numbers expose a toxic trend – and a major policy failure ­– that is threatening the finances of families across the country: Millions of Americans won’t be able to live off of their savings in retirement because they’re surviving off of them right now.

The good news: there’s a new solution on the table – a bill introduced by Representative Jose Serrano (D-NY) this summer that would help millions of Americans secure future retirement funds – and cultivate savings for today. It would, in other words, help Americans to build a cushion that lasts more than 16 days.

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But before we examine Serrano’s solution, it’s critical to understand how we got to this crisis point: Why are a quarter of Americans dipping into retirement savings early? Families tap into their retirement accounts because when disaster strikes, they have no other savings options. Data from the Survey of Consumer Finances shows that the typical household has only about $3,000 on hand. This drops to an abysmal $500 from families below the poverty line. (The withdrawal behavior is particularly common among unemployed or underemployed workers; the Transamerica Center for Retirement Studies estimates that one-third of that population has taken cash out early).

This is why the retirement field’s preferred solution of simply tightening withdrawal restrictions on accounts misses the point: Retirement savings will continue to leak out of their accounts if families don’t have other ways to plug holes in their budget. And the safety net created by savings – which helps a family build resiliency to hardship, and can propel kids from a low-income family onto a higher socioeconomic ladder as adults – will continue to fray.

Washington gets that – and that’s why encouraging savings has long been a policy priority. The problem is, legislators are crafting the wrong policies to help families save.

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Right now, for example, the government invests half a trillion dollars a year into helping Americans save and build wealth. Yet out of that half a trillion dollars, not one cent goes toward flexible savings, and what goes toward retirement savings flows to the top of the income ladder. The Congressional Budget Office estimates that the top 20 percent of income earners will capture two-thirds of the $140 billion in subsidies for retirement alone this year. This isn’t just because these are the people who can most afford to save and are most likely to have an employer sponsored retirement account: it’s also because the tax code values their savings at a much higher rate. If a family earning $25,000 and $200,000 each save $1,000 in a 401(k), the tax benefit to the first is $150 and the benefit to the second is $330. So, lower- and moderate- income families get less support for the retirement savings they’re able to accumulate, and they get no support for the flexible savings they’ll need to keep it there.

Luckily, there’s a better option on the table. The Financial Security Credit Act of 2013, introduced in July by Representative Jose Serrano (D-NY), would offer a new, inclusive, and innovative way for low- and moderate- income families to save. At tax time, every dollar a tax filer set aside from his refund would be matched with fifty cents, deposited directly into his account. If he didn’t already have an account, he could just check a box to set one up. And significantly, the Financial Security Credit would support savings from retirement to an emergency fund, giving families the flexibility to decide what is best for their financial situation. It’s simple, it’s targeted, and it’s overdue.

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And, importantly, it also works. In 2008, New York City launched a pilot to test this model. It was a runaway success. Even though the average family had an income of just $18,000 and most didn’t even have a savings account before participating, eighty percent of households that started the program also finished and came away with almost $600 of their own money before the match was added. Since then, the program, called SaveUSA, has been expanded to Tulsa, Newark, and San Antonio and is showing similar results.

People have a lifetime of needs before they get to retirement. Helping them build the flexible savings that they can use along the way will ensure that there’s more left when they get there. And it will help guarantee that financial threats during that journey, of the government shutdown variety or otherwise, won’t be able to shake that security.