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Faced with an unexpected expense of $400, many families struggle to come up with the cash.
Lack of emergency savings may force them to borrow money at high interest rates to pay for surprise expenses, putting their financial security at risk.
Now Congress has a window to address that issue by paving the way for new emergency savings plans in a lame duck session.
The three emergency savings proposals could be included in a legislative package known as SECURE 2.0, which is set to augment retirement system changes brought about by the SECURE Act in 2019.
Shai Akbas, director of economic policy at the Bipartisan Policy Center, said during a recent web panel, “How we save people for emergencies in this country is at the cusp of a significant shift in public policy and private-sector innovation.” are on.” Hosted by the Washington, DC, think tank.
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coincides with the panel discussion an open letter From the Bipartisan Policy Center Action, along with 40 organizations including Senate Majority Leader Chuck Schumer, DN.Y., and Minority Leader Mitch McConnell, R-Ky., as well as House Speaker Nancy Pelosi, D-Calif., and Minority Leader Kevin McCarthy, R-California.
The letter calls for the inclusion of three bills that would increase emergency savings in the pending retirement package.
“We strongly believe that the Emergency Savings Policy aligns with the goals of the American retirement system and will help increase financial resilience for American families,” they wrote.
Anti-eviction banners are displayed on a rent-controlled building in Washington, DC on August 9, 2020.
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The COVID-19 pandemic was a stress test for many Americans’ finances.
As many parts of the economy shut down, many individuals and families found their income reduced or eliminated entirely.
The federal government intervened and sent an unprecedented amount of aid through three rounds of stimulus checks, an increase in federal unemployment benefits, direct monthly child tax credit payments to parents, and other policies.
Yet the pandemic still prompted some workers to pull money out of their 401(k) or other retirement savings accounts, putting their long-term financial futures at risk.
who had At least $1,000 in emergency savings According to the Aspen Institute, at the height of the pandemic, withdrawals from their retirement savings accounts were half as likely.
Tim Shaw, associate director of policy at the Aspen Financial Security Program during the bipartisan, said, “As people face that crisis, you need that liquid savings to protect your long-term investments and make sure you have a Have a secure retirement and build wealth.” Policy Center Panel.
COVID relief measures helped increase the share of households that could cover an unexpected $400 expense in cash or some other way 68% in 2021An increase of 4 percentage points from 2020. It is also the highest level since the Federal Reserve began the survey in 2013.
Still, 1 in 3 households would need to borrow money to cover an emergency of $400, which is still “very high,” Shaw said.
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Advocates are hoping three proposals that could help encourage emergency savings will be included in Secure 2.0.
That includes Sens. Cory Booker, Dn.J., and Todd Young, R-Ind. As well as a third bill introduced by Sens. James Lankford, R-Okla., and James Bennett, D-Colorado.
A proposal from Booker & Young would allow employers to provide emergency savings accounts to employees in addition to their retirement savings accounts. Employees will automatically be able to set aside up to $2,500, which they can access anytime in case of an emergency.
Booker & Young’s second proposal would allow separate standalone plans outside of retirement accounts, which would be “really important” for employees who don’t currently have a retirement plan through their employer, Akbas said.
A third, the Lankford-Bennett plan, would allow workers to withdraw up to $1,000 penalty-free from their retirement accounts in case of emergency. Those withdrawals will only be allowed once per year; Additional contributions will be required before the second withdrawal can be made.
Chantal Shakes, executive director of retirement policy at the US Chamber of Commerce, said she has “fingers crossed” that all three proposals will make it into Secure 2.0 and that the legislation will pass.
,From an employer’s perspective, we need options,” Schex said.
What may work for one employer may not work for another, he said. Shakes said the three proposals would allow for more options, including possibly encouraging employers who don’t have retirement plans to consider adopting one.
In addition, because hardship withdrawals can reduce workers’ retirement security, these emergency savings options can help prevent those barriers to wealth building.
“People have urgent needs today, and we can’t forget those urgent needs,” Sheiks said. “We need to find a way to balance the needs of today with the needs of tomorrow.”