More than half of all households in the U.S. report having no money set aside for emergencies. Forty percent say they would struggle to cover a $400 emergency expense like a medical bill or car repair. Emergencies happen, and too many Americans will suffer long term financial consequences as a result.
Now, a growing number of employers are offering their employees the opportunity to save for emergencies through a payroll deduction. Employers like this benefit in part because financial stress and insecurity cause lost productivity and higher absenteeism. Furthermore, employees want this benefit. According to AARP research, 71 percent of working adults said they would probably participate in a savings program if their employer offered it.
There are many ways to structure workplace savings programs, but this report looks at a model that includes four key elements to ensure widespread employer adoption and employee participation: 1) automatic enrollment, 2) consumer-friendly features, 3) regulatory feasibility and 4) affordability for employers.
An “emergency savings card program” meets these requirements. It uses a debit-like payroll card. Each pay period, a small amount is deducted from the employee’s pay and loaded onto the card for emergency use.
- Automatic enrollment. To be more effective, employers should use automatic enrollment. With automatic enrollment, an account is opened for each employee and regular payroll deductions into the account are initiated unless the individual decides not to participate. Employees can opt out, including leaving the program, or change the amount they save at any time.
- Consumer-friendly. The emergency savings card model gives employees immediate access to the funds. Employees can pay bills online, make peer-to-peer payments and transfer funds to or from a bank account. Cards cannot be overdrawn so there is no risk of overdraft penalties. The paycard can stay with employees even when they change jobs. And like bank accounts, the cards are 1) federally regulated regarding fee disclosures, 2) FDIC- or NCUA- insured and 3) completely private.
- Good for employers. Payroll cards cost employers very little to set up and administer. They are also easy to explain and simple for employees to use.
- Feasible. The Consumer Financial Protection Bureau (CFPB) recently made clear that employers could apply for protection from liability under Regulation E through an application to test an automatic enrollment payroll deduction emergency savings program.
Importantly, payroll card-based savings accounts can be available to the 14 million Americans who do not have personal bank accounts. They can also be offered by employers that don’t have a retirement plan.
Because the paycard model can be structured to require no opt-in or sign-up, it’s one of the most promising solutions to address the emergency savings challenge. It has the potential to reach 93 percent of the U.S. workforce and incorporates principles of behavioral economics that have been shown to help people reach their savings goals.
Harvey, Catherine S. David C. John. Facilitating Workplace Emergency Savings Programs through Payroll Cards. Washington, DC: AARP Public Policy Institute https://doi.org/10.26419/ppi.00107.001