What Can We Learn About Emergency Savings from the COVID-19 Crisis

What Can We Learn About Emergency Savings from the COVID-19 Crisis

Wednesday, August 12, 2020

For the most financially vulnerable, the CARES Act provided necessary relief to help people pay for housing and other bills. Yet, the need to pass an emergency relief bill so quickly also cast into sharp relief the dire state of savings in the American household and the inadequacy of the social safety net, especially as the disbursement of unemployment insurance has lagged in many states.

For example, a new Pulse analysis by the Financial Health Network shows that nine out of 10 financially vulnerable people used the $1,200 Economic Impact Payment to cover essential bills. The data also found that the stimulus funds were especially useful in supporting the financial health of individuals who had lost jobs. 

“The recent Pulse analysis shows that the recent economic stimulus payment provided a valuable lifeline to those most in need,” explains Thea Garon, Senior Director of the U.S. Financial Health Pulse. “By providing a financial cushion, the stimulus payments helped millions of Americans pay their bills, afford food and healthcare, and keep a roof over their heads.”

Financially Vulnerable used stimulus for essential bills, necessities

The analysis showed more than 90% of Financially Vulnerable people used the CARES Act stimulus for bills; 87% used stimulus to pay for necessities like food and medicine. Only 29% of people in this group put their stimulus payment into savings, compared with 47% of people who are Financially Healthy. Many people in the Financially Coping segment also used the stimulus for bills and necessities.    

Table, Use of Stimulus Payments by Financial Health Tier

Source: Financial Health Network

While the stimulus has been credited with curbing the economic impact of the pandemic on households, the usage of funds highlights the systemic failure to help Financially Vulnerable households have small-dollar emergency savings on hand. The payment arrived against the backdrop of a population where 37% of all Americans don’t have $400 to cover a shock without having to sell something or borrow the money, according to a 2019 Federal Reserve study.

The savings crisis in the U.S. is not new. Factors such as wage stagnation; changes in defined benefit programs from employers; systemic barriers to wealth building; and rising medical, education, and housing costs have all contributed to this crisis over decades. Financially vulnerable and coping Americans represent hundreds of millions of people: The lack of emergency savings and the overwhelming use of stimulus payments for basic necessities show just how fragile households are financially and how imperative it is to take action.

Why emergency savings support is critical

The stimulus payment analysis has implications for emergency savings programs, such as the programs BlackRock’s Emergency Savings Initiative is conducting with its partners. While government stimulus payments are subject to the whims of congressional approval, the ability for employers and other institutions to facilitate access to small-dollar liquid savings is not. A future emergency may not come with a public-sector stimulus package, which means individuals must rely on other sources to access cash during an economic shock.

Financial institutions and employers have an important role to play in cash savings, the Initiative believes. Depending on the organization type, that role can be to ensure that individuals have enough wages to enable saving for an emergency, the tools and information to take action to save easily, and then the ability to access those funds instantly in their own savings accounts.

Private and  public sector change needed

Of course, even robust emergency savings cannot completely insure against an economic shock of COVID-19s magnitude. In such cases, a strong social safety net is also needed to maintain the nation’s financial health. Unfortunately, this crisis has also demonstrated that America’s social safety net is insufficient for hundreds of millions Financially Vulnerable or Financially Coping Americans. If the unemployment insurance system was sufficient to support families through a crisis or had the capacity to process claims in a timely manner, some of the forms of emergency relief from the CARES Act might have been unnecessary.

Dan Murphy, policy manager for the Financial Health Network, says better preparation is required to avoid the need to create ad hoc relief programs in the midst of a crisis.

“Employers’ role in paying their employees well enough to save for a rainy day is critical to mitigating the savings crisis. Government’s role, on the other hand, is to be better prepared for an economic crisis,” Murphy says. “Many other developed economies had functional unemployment insurance and short-term working schemes going into this crisis. With the right preparation, such measures kick in automatically during a downturn, avoiding the need to stand up a new, inevitably imperfect relief program like the Economic Impact Payment program or the Paycheck Protection Program.”  

Methodology Data cited above was published first here. This data comes from the 2019 and 2020 U.S. Financial Health Pulse surveys (administered in April and May of each year),  a research initiative funded by Flourish, MetLife Foundation, and AARP.

BlackRock’s Emergency Savings Initiative

BlackRock announced a $50 million commitment to help millions of people living on low to moderate incomes gain access to and increase usage of proven savings strategies and tools, ultimately helping them establish an important safety net. The size and scale of the savings problem requires the knowledge and expertise of established industry experts that are recognized leaders in savings research and interventions on an individual and corporate level. Led by its Social Impact team, BlackRock is partnering with innovative industry experts Common Cents Lab, Commonwealth, and the Financial Health Network to give the initiative a comprehensive and multilayered approach to address the savings crisis. UPS, Uber, Mastercard, Etsy, Brightside, Arizona State University, and Acorns have joined BlackRock’s Emergency Savings Initiative to help their employees, customers, gig workers, and college students take the essential first step toward long-term financial well-being.