If The Feds Really CARE, they Should Teach Americans to Fish

If The Feds Really CARE, they Should Teach Americans to Fish
(AP Photo/Mark Lennihan, File)
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“Give a man a fish, and you feed for him day. Teach a man to fish, and you feed him for a lifetime,” goes the old adage.

During this economic crisis, the Federal government is giving a lot of “fish” to millions of American households through direct economic impact payments and expanded unemployment assistance. This financial assistance, a key provision of the estimated $2 trillion, Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) signed into law on March 27, 2020, gives short-term financial relief to over 80 million Americans. As the global health crisis recedes and economic policies turn to recovery, policy makers must now provide the long-term financial and tax infrastructure necessary to teach Americans “how to fish,” by creating individual financial safety nets through systematically saving money.

Most Americans do not save enough money for small-scale emergencies, let alone cataclysmic economic shock. According to the Federal Reserve 2019 Report on the Economic Well-Being of U.S. Households, 37% respondents said they did not have enough saved to pay for a $400 emergency. If a large segment of American households does not have enough money saved for unexpected medical or auto repair bills, it is even more unlikely that they have enough saved to cover months of the normal recurring expenses.

The Pew Research Center, a nonpartisan think tank and public polling organization, investigated this financial issue through a survey conducted April 7-12, 2020. Not surprisingly, 53% of all respondents said they do not have enough emergency funds to cover three months of expenses in case of sickness, job loss, economic downturn or other emergencies. 77% of low-income adults said they do not have rainy day funds set aside to cover expenses for three months.

As with most economic downturns, those in the lowest income bracket suffer the most. Not only do the vast majority of low-income adults lack sufficient savings for a crisis, low-income jobs are typically the first ones eliminated in an economic downturn. As an example, during the current COVID-19 economic crisis, almost 40% of employees earning less than $40,000 were laid off or furloughed by early April 2020, according to Federal Reserve data.

For the millions of Americans with insufficient savings during the COVID-19 dual public health and economic crisis, government provided “fish” might be enough to survive economically for the time being. However, the economic impact payments and expanded unemployment insurance are costly for the American taxpayers, and not sustainable in the long term. In some instances, they even provide a financial disincentive for employees to return to work once their employers reopen if the CARES Act financial assistance, when combined with state unemployment insurance, exceed the wages being offered by their employer.

To offset the possible catastrophic effect of future economic crises, policy-makers must create a structure that enables Americans to save money earnestly and frequently. One way to do this is to create a tax-deferred Emergency Savings Account (the “ESA”).

Well-established behavioral economic theory holds that people are more likely to save money if it is automatically withdrawn from a paycheck and deposited into a separate account. In “For Better or Worse Default Effect and 401(k) Savings Behavior,” a journal article published in the “National Bureau of Economic Research: Perspectives on the Economics of Aging,” a team of behavioral economists concluded that automatic enrollment increased the 401k participation rate to 90% and had a positive impact on wealth accumulation.

Further demonstrating that 401(k) plans are an effective savings mechanism, the American Benefits Council analyzed the U.S. Department of Labor, Internal Revenue Service, and Pension Benefit Guaranty Corporation 2016 Form 5500 Annual Report and determined that more than 100 million total 401(k) total plan participants held approximately $5.7 trillion 401(k) assets as of the end of 2016. Additional “forced-savings” examples include 403(b) retirement plans, union-sponsored saving programs for vacations, and holiday savings plans offered at local banks.

Policy makers searching for initiatives to encourage individual savings and reduce the need for massive government intervention during significant negative economic events should create employee-based emergency savings accounts similar to a 401(k) retirement plan in the Internal Revenue Code.   

The ESA should operate like a 401(k) plan. The ESA should allow qualified employees to contribute a small percentage of their salary (.5% - 2%) tax-deferred into the ESA plan, and employers, in turn, should have the option to contribute and/or match the employee contribution.  Employees should be able to invest in conservative or aggressive funds, similar to 401(k) accounts, and the account should be portable and track to the employee, not the employer.

Unlike a traditional 401(k) plan that is tax-deferred until the funds are withdrawn, the ESA should allow participants to withdraw funds without federal or state income tax implications if the funds are withdrawn for a qualified national economic emergency, like the economic crisis caused by COVID-19, or a qualified regional or local economic emergency like Superstorm Sandy in 2012.

To further incentivize ESA participation and increase the rate and depth of personal savings, participants should be allowed to withdraw funds from the ESA for personal economic emergencies — prolonged loss or reduction of employment, business shutdown, or disability —and defer the income tax they would normally pay on the withdrawal over a five or ten year period.

If the funds are withdrawn for another purpose, the employee should pay taxes based on their income-bracket during time of withdrawal. If an employee does not need to access the funds in their ESA during the years they are in the workforce, the funds can be rolled-over into a 401(k) or other retirement plan, and disbursed and taxed according to their terms.

Like most interest-accruing vehicles, ESA plans should realize significant gains over time. As an example, if ESA plans existed in 2010, an employee earning $50,000 annually and allocating 1% of their salary to the ESA would have achieved savings of $6,603.39 by 2020 if the Plan realized a 5% annual interest rate with the interest accruing once annually. If their employer matched the employee contribution and also contributed 1% annually of the employee’s salary to the ESA, the total savings would be $13,206.

According to data from the U.S. Bureau of Labor Statistics Consumer Expenditure Survey, in 2018, the average American household consisting of 2.5 people spends approximately $5,100 per month on household and living expenses. As shown above, the ESA hypotheticals would provide a safety net during an economic crisis without the federal government over-leveraging the national debt to provide stimulus money.

To teach America to fish, policy-makers must make saving money easy, automated and cost-effective. ESA does all three. Creating ESA plans will provide a financial safety net for tens of millions of Americans, create a significant new capital class, and lessen the government’s burden during the next, inevitable economic emergency.

Nicholas T. Terzulli is an attorney at Farrell Fritz, P.C. on Long Island and was formerly a municipal policy advisor and economic development official.



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