How to solve the emergency savings crisis

Claire Chamberlain: 39% of all Americans could not afford a $400 unexpected emergency expense and when you break it down further by gender and by racial demographics. The numbers are even more stark.

Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm your host Oscar Pulido. In an era of economic challenges and uncertainties, having an emergency savings fund is a financial lifeline that can provide peace of mind. During turbulent times, yet statistics reveal a startling reality.

66% of the US population lives paycheck to paycheck. And lacks adequate savings to weather, unexpected storms. The problem is not limited to the US, and it seems to only be getting worse. Is there light at the end of the tunnel to find out the answer to that question and how both the private and public sectors are trying to resolve the lack of emergency savings?

I'm pleased to welcome Claire Chamberlain, global Head of Social Impact at BlackRock. Claire, thank you so much for joining us on The Bid.

Claire Chamberlain: I am delighted to be here, Oscar, it is a pleasure.

Oscar Pulido: Well, Claire, in your role as Global Head of Social Impact at BlackRock, you come across a wide range of social and economic issues. So, tell us why emergency savings is so important to you.

Claire Chamberlain: Well, when we think about our work, we start with the core purpose of BlackRock, which as you know, is to help people build financial wellbeing and security over a lifetime. And with that as the going in philosophy, we said to ourselves, how can we advance that purpose? And building financial wellbeing is aspirational for far too many people because if you're living day to day paycheck to paycheck, that is something that is very hard to come by.

And so, in thinking about how do we help people get closer to that aspiration, emergency savings is a topic and a focus that really has emerged over the last couple of years.

Oscar Pulido: How big of a problem is this or are there any numbers that would allow us to quantify when we think of what an emergency savings pot looks like?

Claire Chamberlain: So, in 2017, for the first time, the Federal Reserve published a report which outlined the financial precarity of American households. In that report there was a statistic that was really a wakeup call for many people. And the statistic was 39% of all Americans could not afford a $400 unexpected emergency expense.

And that was not just people living under the poverty line, but all Americans. And in fact, that number, when you break out people living on low and moderate incomes was 58%. It's a big number affecting a lot of working families and it was much larger than people anticipated.

Unfortunately, while there had certainly been improvements in the labor markets since 2017, there was a report released this past May where the number showed some improvement, now 37%, but again, this is of all Americans and when you break it down further by gender and by racial demographics.

The numbers are even more stark. for low- and middle-income families, who are Hispanic is over 70%. And for black families it's 72%.

Oscar Pulido: So, the numbers are surprising because the percentages are high, covers a pretty meaningful part of the population, but also the emergency expense that you outline $400. It doesn't feel like a lot has to go wrong for all of a sudden somebody to have a $400 bill. So now what is the impact on individuals, businesses and then the economy? because it's not just affecting the individual who has that unexpected expense, it must reverberate even broader?

Claire Chamberlain: Absolutely. You can think about it top down or bottom up and either way it's, currently a pretty grim situation. $400 is not a lot for a hiccup, an unexpected expense, whether it's a car breaking down, an unexpected medical bill, increasingly in our country, natural disasters and when you don't have that cash cushion readily accessible on the sidelines, you have to resort to really costly alternatives like payday loans, or even dipping into your 401K retirement account.

And we know that not only comes with penalties, but it means then you've diminished the body of investible assets, which hits you down the road as well as in the near term.

That's the individual level, in addition to families it also impacts employers. And we know that the productivity loss due to financial stress is as much as 15 hours per week per employee, which turns out to be an estimated $5 billion to employers in this country on a weekly basis.

So, the numbers are big and they're numbers, frankly, that employers have started to acknowledge and take action to try and remediate.

Oscar Pulido: And I know BlackRock has been doing some research on this topic, maybe you could share a little bit of what are the findings of that research?

Claire Chamberlain: So, the BlackRock Foundation, is focused on, financial security. During COVID there was a pretty unique opportunity to study the impact of that material economic disruption on individuals and families. So, working with one of our nonprofit partners, Commonwealth, we were able to do some research around how did having liquid savings, impact your ability to weather the disruption of the pandemic? One of the findings that emerged is that people that had less than $2,000 of liquid savings available to them were twice as likely to tap into their retirement account prematurely. So that described a pretty direct connection between liquidity and being able to build for the long term.

Oscar Pulido: And you've mentioned that twice now it's an important thing, which is people have the money to draw now, but they're now foregoing a more comfortable retirement so they're just trading off one problem for the next. Is this a US issue only then? Because as you're describing this, I'm wondering if there are other countries that are also experiencing something similar with a lack of emergency savings.

Claire Chamberlain: Well, I'd love to tell you this is isolated to the United States. It is not. And in fact, we have been working with partners in the UK, Nest Insight in particular, which is the research arm of the Nest Pension Scheme, which is Britain's Public Pension Program and the stats over in the UK in some ways are starker than the stats here, Nest Insight did research that showed one in four citizens in the UK could not come up with a hundred pounds fund for an unexpected expense. So, the UK and the US among the wealthiest countries in the world, there was further research done again coming out of Covid that has shown that countries that are lower- and middle-income countries, the implications of economic disruption of interruption in wages, for instance, people have far less to fall back on. And so, the problem we've described here in this country is by no means unique.

Oscar Pulido: That's interesting, you said a hundred pounds or a hundred sterling. That's a lot less than even $400, which you mentioned in the US. So, the bar's even lower to an individual in the UK for, that lack of emergency savings to really hit them.

You've painted this problem that is clearly prevalent in some pretty major economies. When you look ahead, what's that light at the end of the tunnel that you're seeing?

Claire Chamberlain: Well, there is light at the end of the tunnel, because there is an endless amount of innovation that as humans that we are capable of and it's happening, in trying to address, this financial precarity. One of the things that we found, with our research and with the people who were interested in partnering with us, is that the workplace was a very receptive arena for exploring how do we address this financial stress and vulnerability that workers feel. And employers and those that support them, like record keepers and payroll providers and other financial institutions, they have a lot to gain from trying to crack this I mentioned $5 billion a week in lost productivity, well that turns out to over 250 billion a year.

So, the incentive to try and not just chip away, but to pivot in a meaningful way is definitely there. And shortly after those early Fed numbers were published, BlackRock founded the BlackRock Emergency Savings Initiative to try to begin to address the problem and to encourage and spur innovation. And we really wanted that innovation to take place across channels, meaning we wanted to see it with large scale employers and with record keepers, fintechs and payroll providers because we didn't know enough to pick the horse but we thought our hypothesis was the more demonstrations and pilots we could get out into the marketplace with workers, the greater our chances of making a difference and taking friction out of that effort to build short-term savings.

Oscar Pulido: And this BlackRock initiative that you mentioned, the emergency, savings initiative was 2019, I think is when it started. It's four years later we've lived through a pandemic during that period. So how would you say it's going, and can you give some examples? You said a couple of things, record keepers, payroll providers. Are there some examples of some of these stakeholders that you've worked with and things that they're doing?

Claire Chamberlain: So, a couple of things. The initiative, at the end of last year marked its completion of phase one, and we published a learnings report in June of this year. I'll share a little bit more about that later. but in the report we do highlight case studies of partners that we worked with among them are Voya, who was the first record keeper to join the BlackRock Emergency Savings Initiative, and they were working on making available an after tax liquid savings account that people could, when they set up their retirement plan contributions, could also indicate that they wanted to build some short term savings where they could, access it whenever they wanted to without penalty.

UPS also came on board, and they did a whole internal marketing refresh on their emergency savings account and as a result of that using some insights that we have gathered from behavioral economists, they were able to increase usage by 40% of people who were offered that opportunity to build short-term savings.

Another key partner, ADP is a payroll provider, they provide payroll services for one in six Americans, and they created a savings sleeve on their pay card app and that resulted in $1.5 billion dollars of new savings, so pretty significant adjustment to an existing product that had meaningful uptake.

And then finally, another partner was AutoNation which employs over 20,000 people across the country. As an employer, they recognized they have a very diverse workforce they didn't want to just put one offering in front of their employees so they are in the process of testing three different offerings you could do a split deposit right from your paycheck. Or you could build this liquid savings on a payroll card, or you could do the savings sleeve that's adjacent to the retirement product.

They're going to let you decide as an employee and you could pick some or all of those offerings. We've really had the privilege to see this take hold directly with workers, but as provided by employers or, companies that support those employers.

Oscar Pulido: And all these examples you mentioned. It's not that people can't save, but sometimes you just have to make it easy for them. You have to provide some convenient method to do it. We all have good intentions, but sometimes we just need somebody to point us in the right direction. And that, that seemed to be like a commonality and all these examples that you just discussed.

Claire Chamberlain: Absolutely. Ideally, it's set it and forget it, or it's have it set for you and forget it and watch it build. But that's exactly right. One of the key learnings from the Emergency savings Initiative is that people even, who are living on low and moderate incomes they can save if you give them the right tools at the right time, like the point of payroll, they can save money and that even saving small dollar amounts can have really significant benefits for individuals and families. And that kind of goes back to that notion of, gosh, if you only had $400 more and you need a car repair so that you can keep going to work so you can keep earning money because you're an hourly worker, it's that either virtuous or counterproductive cycle. And building up that small dollar savings is super important to people.

Oscar Pulido: And that story you just gave is very real, the hourly worker whose car breaks down. And boy, you said if they just have that $400, it really changes their day-to-day pretty significantly.

Claire Chamberlain: And probably the child that they're dropping off at daycare as well.

Oscar Pulido: Voya, ADP, you mentioned some of these partners along the way with the Emergency Savings Initiative. Those are private sector companies, but let's talk about the public sector. In the US there's been some legislation, the Secure 2.0 Act, how does that influence this emergency savings topic that we've been talking about?

Claire Chamberlain: The legislation secured 2.0 that you mentioned was passed in December with bipartisan support which is terrific. The thrust, the primary thrust of Secure 2.0 is to encourage more and more employers to offer retirement plan programs to their employees and to encourage employees to take advantage of those programs. As relevant to the conversation that we're having here today, there are provisions in Secure 2.0 to make it easier for employers to offer an emergency savings options to their employees.

So, there are two non-mandated options that employers now have to help employees build emergency savings. The first is a $1,000 emergency withdrawal that they can make in a year from their 401K or equivalent retirement account, and they can make this without penalty. The second option is a $2,500 emergency savings account, which is linked to the retirement account and has automatic enrollment option, meaning the employer can set that up so it just automatically funds from payroll go into this $2,500 emergency savings account, which then sits alongside the retirement account.

The auto enrollment feature is the first time we've seen this in use with respect to this liquid savings, and we think it really has, a lot of incredible upsides because we know from auto enrollment participation that we've seen with retirement accounts it makes all the difference in terms of, really amplifying usage among participants.

Oscar Pulido: And it just goes back to encouraging good behavior, people want to do it, but you need to almost set it up and then we're off to the races,

Claire Chamberlain: And just let it build. And then, having this account that you can use as necessary without penalty. And that's really the secret here. We think there is a lot more innovation still to be done because Secure 2.0 is set up with this account being in plan, meaning it's linked to the retirement plan, but we know that there's an opportunity down the road to set up something similar for employees that are not saving in their retirement account but still have those needs to build emergency savings.

Oscar Pulido: So that'll be one of the many next steps that is coming from this. So, you've touched on the private sector, now the public sector in terms of how it's trying to address the issue. How should an investor be thinking about this issue when it relates to their portfolio and they're putting money to work in the market?

Claire Chamberlain: I think one of the things that's been so exciting about this work are the results but through, our partners we're able to reach 10 million Americans and build $2 billion in incremental new liquid savings which is a fairly unprecedented impact metrics from a philanthropic endeavor and so we're very proud of that.

But back to your question, I think what that shows is there's real appetite for building liquid savings and there is real ability to do that if employees are offered, back to right product at the right time. And as an investor, I would think about, are the companies I'm investing in, what kind of prioritization are they making of the financial health of their employees, and emergency savings is a part of that. So, if you're an employer like AutoNation really thinking in a very 360 way about your commitment to your workforce, that’s the way I would take this perspective and translate it to my portfolio.

Oscar Pulido: All else equal, a happier workforce is more productive, more productive business is more profitable, and you can then put yourself in the mind of that investor. And I want to be invested in companies like that.

Claire Chamberlain: And sustainable over time!

Oscar Pulido: Claire, what brought you into this field of social impact? Hearing you talk about this topic, it's obviously a passion of yours, but where did this passion start?

Claire Chamberlain: I have always, gravitated towards important work, and I've always gravitated towards organizations that I think have the standing in our world to really drive important work.

I first started my career in finance and over time, had opportunities to get involved in philanthropy and into venture philanthropy and from that came, here to BlackRock and have been involved in the setup of our strategic philanthropy commitments and program and how we support our employees and how we show up in our communities. So, I feel very fortunate for the opportunities I've had.

Oscar Pulido: well, we're, fortunate to have learned a lot about emergency savings, the issue that it is, and how we're trying to fix it. Thank you for joining us on The. Bid.

Claire Chamberlain: Thank you, Oscar.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you enjoyed this episode, check out our retirement miniseries featuring Anne Ackerley, discussing how to plan your roadmap to retirement. Subscribe to The Bid wherever you get your podcasts.

Sources

Report on the Economic Well-Being of U.S. Households in 2017, Federal Reserve (2018)

FED Economic Well-Being of U.S. Households in 2022 Fact Sheet (PDF)

ASPAA Article Aug 2021 “Employee Financial Stress Costs Companies Nearly $5B a Week”

Nest Insight Report 2022 “Does payroll autosave support employees to get started with saving?”

FEDS Notes Sep 2020

Article Economics Observatory, June 2021 “How has the pandemic affected household finances in developing economies?”

Mercer Report “Inside Employees Minds Vol 2” 2017 Repo

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