Working Paper: NBER ID: w26498
Authors: John Beshears; James J. Choi; Mark Iwry; David John; David Laibson; Brigitte C. Madrian
Abstract: Many Americans live paycheck to paycheck, carry revolving credit balances, and have little liquidity to absorb financial shocks. One consequence of this financial vulnerability is that many individuals use a portion of their retirement savings during their working years. For every $1 that flows into 401(k)s and similar accounts, between 30¢ and 40¢ leaks out before retirement (Argento, Bryant, and Sabelhaus 2015). We explore the practical considerations and challenges associated with helping households accumulate liquid savings that can be deployed when urgent pre-retirement needs arise. Automatically enrolling workers into an employer-sponsored “rainy-day” or “emergency” savings account—terms that we use interchangeably in this paper—funded by payroll deduction could be a cost-effective way to achieve this goal. We explore three specific implementation options: (a) after-tax employee 401(k) accounts; (b) deemed Roth IRAs under a 401(k) plan; and (c) depository institution accounts. We evaluate the pros and cons of each approach and conclude that all three approaches merit exploration and field testing.
Keywords: Emergency Savings; Employer-Sponsored Accounts; Behavioral Economics; Financial Preparedness
JEL Codes: D14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Automatic enrollment (H55) | Increase in overall savings rates (D14) |
| Automatic enrollment (H55) | Greater accumulation of liquid savings (E21) |
| Present bias (D15) | Immediate consumption preference (D11) |
| Rainy day savings accounts (D14) | Mitigation of retirement savings depletion risk (D14) |
| Payroll deductions (J32) | Cost-effective strategy for employers and employees (J32) |
| Employer-sponsored rainy day savings accounts (J32) | Enhanced financial resilience (G59) |