Congress could make it easier to set aside money for emergency expenses

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Many families struggle to make money when faced with an unexpected $400 expense.

That lack of emergency savings can force them to borrow money at high interest rates to pay for surprise spending, putting their financial security at risk.

Now Congress has a window to address the issue by paving the way for new contingency savings plans in the lame session.

Three emergency savings proposals may be included in a legislative package known as Secure 2.0, which is expected to amplify the changes to the pension system brought about by the Secure Act in 2019.

“We are on the cusp of significant change in how people save for emergencies in this country, thanks to public policy and private sector innovation,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center , during a recent web panel hosted by the Washington, DC think tank.

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The panel discussion coincided with an open letter from the Bipartisan Policy Center Action with 40 organizations to Senate Majority Leader Chuck Schumer, DN.Y., and Minority Leader Mitch McConnell, R-Ky., as well as House Speaker Nancy Pelosi, D-California, and Minority Leader Kevin McCarthy, R-Calif.

The letter called for the inclusion of three bills that would have boosted emergency savings in the outstanding pension package.

“We strongly believe that the emergency savings policy is in line with the goals of the US retirement system and will help strengthen the financial resilience of American families,” they wrote.

Because emergency savings fall short

Anti-eviction banners are displayed on a rent-controlled building in Washington, DC on August 18. 9, 2020.

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The Covid-19 pandemic has been a stress test for the finances of many Americans.

With many parts of the economy shut down, many individuals and families have found that their incomes have been reduced or eliminated altogether.

The federal government stepped in and sent unprecedented amounts of relief through three rounds of stimulus checks, increased federal unemployment benefits, direct monthly child tax credit payments to parents, and other policies.

However, the pandemic has still led some workers to withdraw funds from their 401(k) or other retirement savings accounts, putting their long-term financial future at risk.

Those who had at least $1,000 in emergency savings at the height of the pandemic were half as likely to withdraw from their retirement savings accounts, according to the Aspen Institute.

“As people navigate that crisis, you need those liquid savings to protect your long-term investments and make sure you have a secure retirement and build wealth,” said Tim Shaw, associate director of policy at the Financial Security Program at . Aspen, during the Bipartisan Panel Standards Center.

Covid relief measures have helped push the share of households who could cover an unexpected expense of $400 in cash or cash equivalent to 68% in 2021, a 4 percentage point increase from 2020. It also marks the highest level since the Federal Reserve began its survey in 2013.

However, 1 in 3 households would have to borrow money to cover a $400 emergency, which is still “too much,” Shaw noted.

How 3 proposals can promote savings

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Backers hope three proposals that could help encourage emergency savings will be included in Secure 2.0.

Which includes two bills proposed by Sens. Cory Booker, DN.J., and Todd Young, R-Ind., as well as a third created by Sens. James Lankford, R-Okla., and James Bennett, D-Colorado.

A proposal by Booker and Young would allow employers to provide emergency savings accounts to workers in addition to their retirement savings accounts. Employees would be able to automatically set aside up to $2,500 that they could access at any time in case of an emergency.

Booker and Young’s second proposal would allow for separate self-employment plans outside of retirement accounts, which would be “really important” for employees who don’t currently have retirement plans through their employer, Akabas noted.

A third, the Lankford-Bennett plan, would allow workers to withdraw up to $1,000 from their retirement accounts without penalty in an emergency. Such withdrawals would only be allowed once a year; further contributions would be required before making another withdrawal.

Chantel Sheaks, executive director of pension policies at the US Chamber of Commerce, said she had “crossed her fingers” that all three proposals will go Secure 2.0 and that the legislation will pass.

From an employer’s perspective, we need choice,” Sheaks said.

What might work for one employer might not work for another, he noted. The three proposals would allow for more options, including being able to encourage employers who don’t currently have retirement plans to think about adopting them, Sheaks said.

Also, because hardship withdrawals can reduce workers’ retirement security, these emergency savings options can help prevent those hurdles to wealth creation.

“People have emergency needs today and we can’t forget about those emergency needs,” Sheaks said. “We need to find a way to balance today’s needs with tomorrow’s.”

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