According to a recent survey by Bankrate, over half of U.S. adults don’t have enough money in the bank to tide them over for three months. And 28% say they have no emergency savings at all.
Brigitte Madrian, the Dean of Brigham Young University’s Marriott School of Business, joined Yahoo Finance’s “YFi PM” to discuss the situation and a plan she has to help fix this (while maybe shoring up retirement accounts at the same time).
“We have a proposal to help employers support saving for both retirement and for emergencies or rainy days” she said. The plan, outlined in a policy paper with several fellow scholars, would let employers automatically enroll their employees into short-term savings accounts alongside their retirement accounts.
At the beginning, the employees’ contributions would be split evenly. Then, once the savings account has enough funding to provide a decent cushion, all the savings would automatically flow toward retirement.
According to Madrian, the plan would give workers “the buffer that they need in the short term,” while facilitating “a greater retirement accumulation at the same time.”
A 2018 study from the Federal Reserve puts a point on the scale of the problem. The central bank found that 40% of adults, “if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money.” Americans often draw upon their retirement savings to deal with unexpected costs.
Under current law, employers are allowed to offer short-term savings plans to their employees (though few do). It is against the law for these plans to incorporate automatic enrollment.
Madrian appeared as part of Yahoo Finance’s ongoing partnership with the Funding our Future campaign, a group of organizations advocating for increased retirement security for Americans.
Her plan was informed by her work as a leading behavioral economist. She notes that “if you have two different accounts, you will have different labels attached to them,” so that just having the label “is going to change the way that you think about what you will allow yourself to do with the money in that account.”
She hopes that eventually the laws will change to allow the idea to be adopted widely. “Hopefully, at some point, the federal government will step into the mix to help all Americans save for retirement,” she says.