By John Pelletier
If we are smart, America could help all of our workers be financially resilient. To protect those most vulnerable economically from a future disaster like the COVID-19 pandemic, Congress should create an emergency savings plan for working Americans.
Certainly the federal government can tweak my idea outlined below, but there is absolutely no reason why we cannot have a savings plan for all the waitresses, bartenders, hostesses, dishwashers, retail salespersons, cashiers, barbers, hairdressers, porters, bellhops, fitness workers and other hard-working employees.
The coronavirus has demonstrated just how financially fragile so many our neighbors really are. They have lost jobs, been furloughed or have had their hours greatly reduced. They are struggling to pay for life’s necessities as they wait for their CARES Act check and unemployment benefits to arrive. They have little or no liquidity.
Never before have so many people in America experienced a major crisis like this in such a short amount of time.
Here is a snapshot of many who are being financially crippled by the virus:
|Major occupation category||Employment in 2018||Median annual wage in 2019|
|Food preparation and serving related occupations||13,664,000||$24,220|
|Sales and related occupations||15,728,600||$29,630|
|Personal care and service occupations||7,117,200||$26,220|
|Total of above three categories (23% of US total employment)||36,509,800||Not Applicable|
|Total of all occupations||161,037,700||$39,810|
|Source: Bureau of Labor Statistics|
We should have seen this coming. The 2018 FINRA National Financial Capability Study indicated that 46% of adults did not have rainy-day funds that would cover three months’ expenses, one half of adults found it difficult to cover monthly bills and expenses, and only four out of 10 adults were saving money.
Even if we cannot prevent the working poor from living paycheck to paycheck, we can and must help them save for emergencies. They need financial shock absorbers, and my hope is that a silver lining of the COVID-19 cloud hanging over us will be the adoption of a national savings safety net.
Congress needs to support policies that encourage and promote rainy-day savings for those with low incomes. Even savings as modest as $2,000 per working individual could dramatically increase financial stability.
Too many poor Americans who work hard are one emergency away from a financial crisis and perhaps even bankruptcy. It is not just caused by a job loss, it is often an unexpected health-care issue or something as simple as not having the funds to repair the car that they need for work.
We knew this would happen. A 2018 survey by the Federal Reserve found that four in 10 adults could not cover a $400 unexpected emergency expense. These are the Americans that have been hardest hit by the current pandemic.
My vision would be that all workers are automatically enrolled in a plan that withholds 2% of their pay, and these savings would be tax-deductible up to $1,500 per year. Withholding stops on all incomes in excess of $75,000. This could be phased in at 1% of income a year over a two-year period.
The savings would be held by the U.S. Department of the Treasury and would be given rates of return equal to the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +1.34% , and interest earned would be tax deferred. This is similar to a savings bond with a slightly better return.
The savings plan would reduce the amount of debt the Treasury would need to sell each year to fund the deficit. According to the Bureau of Economic Analysis,, total wages and salaries in 2019 were $9.3 trillion. It is likely that a worker savings plan could fund $50 billion to $100 billion of the nation’s annual deficit.
Withdrawals from the savings account would be limited to specific emergencies like job loss, health-care emergency, disability, death, and other qualifying withdrawals, and would be exempt from any income tax.
Uncle Sam should match employee savings up to $1,000 per year until the plan reaches $10,000 for those earning 150% or less of the federal poverty guidelines.
The IRS could create a system whereby all or a portion of an employee’s tax refund could go seamlessly into their savings account as directed by the worker on their tax-return filing. Under certain defined conditions, all or a portion of a savings account could be transferred to an IRA account.
Last year, the federal government gave more than $252 billion in tax breaks for retirement plans to businesses and individuals. Most of this money went to wealthy Americans and corporations.
This savings plan is not a handout, but rather promotes good personal finance habits. It would be not only humane, but also financially more sound than responding to each crisis with multi-trillion dollar bailouts and stimulus packages. In short, it would be good for all taxpayers.
There is precedent for this idea. From 1911 to 1967, the Postal Savings System was created so Americans could save for emergencies at their local post office. It’s time to go back to the future.
John Pelletier is director of the Center for Financial Literacy at Champlain College in Burlington, Vt.