The associate director of the Center for Social Development (CSD) urged U.S. senators on Thursday to create long-term asset-building policies and to use such “golden moments” as tax time to urge Americans to save.
“With 75 percent of filers receiving a tax refund, tax time is a unique opportunity for saving interventions,” Michal Grinstein-Weiss, PhD, an associate professor at the Brown School of Social Work at Washington University in St. Louis, told the U.S. Senate Special Committee on Aging.
“For many low-income households, the tax refund is the largest lump sum they receive all year,” she said during the hearing about retirement savings. Her testimony focused on savings barriers and opportunities for low- and moderate-income households, and she suggested four reforms to spur savings and alleviate retirees’ over-reliance on Social Security.
“What we have learned from our research is that everyone—even those with very little income—wants to and can save when provided structured opportunities to do so, but there are many barriers that keep low- to moderate-income households from saving,” said Grinstein-Weiss, who leads research on savings experiments including Refund to Savings, the largest such experiment in the United States.
Others who testified Thursday were Jean Chatzky, financial journalist and financial editor of NBC’s Today show, Alicia Munnell, PhD, director of the Center for Retirement Research at Boston College, and Rob Carmichael, human resources director at Maine Savings Federal Credit Union.
Sen. Susan M. Collins (R-Maine) chairs the committee, and Sen. Claire McCaskill (D-Missouri) is the ranking member.
“A comfortable retirement is out of the question for many seniors,” Collins said. “It’s shocking to know that half of Americans have saved nothing for retirement.”
Senators heard estimates from the Center for Retirement Research that a $7.7 trillion gap exists between what Americans have saved and the amount necessary to maintain current living standards in retirement.
“This is a crisis that is real in our country right now,” McCaskill said, noting that only 45 percent of Missourians are saving in a retirement plan.
During her testimony, Grinstein-Weiss encouraged these reforms:
Make saving money as automatic as possible. Use “opt out” and default techniques to streamline the process and reduce complexity. “If people do not want to save, they can opt out,” she said. When Maine, for example, switched from an opt-in to an opt-out program, the take-up rates for its 529 college saving program increased from 40 percent participation to 100 percent, she told the committee.
In an example related to retirement, she cited the new Illinois Secure Choice program. It provides automatic enrollment for employees of small-businesses to open Roth IRAs with a 3 percent default contribution. Similarly, the Retirement Security Act of 2015 has the potential to use automation and defaults to increase saving for retirement among employees of small businesses, Grinstein-Weiss said. Collins is the sponsor of the legislation, and McCaskill is a co-sponsor.
Leverage “golden moments” for saving. Using insights from behavioral economics, Grinstein-Weiss launched the Refund to Savings initiative in collaboration with Intuit—the makers of TurboTax—and Duke University. In two years, they have intervened with more than a million low- to moderate-income households. “By using simple changes to the tax software, we significantly increase the number of people who save their refund and the amount they save,” Grinstein-Weiss said.
Starting a new job is another example of a golden moment, she said, as employees make retirement saving decisions that have a major impact on their retirement security. “This golden moment should be structured to be opt-out enrollment,” she said.
Build unrestricted emergency savings. Financial shocks severely affect the financial stability of low- to moderate-income households and their ability to save. Two of three experience at least one emergency, such as unemployment, a major car repair or a trip to the hospital, in the span of six months. To cope, they often withdraw from retirement accounts, use alternative financial services or skip paying bills. Grinstein-Weiss recommended that policymakers develop savings products that don’t penalize households if they need funds for emergencies.
The U.S. Treasury’s myRA is an example. It is a flexible, simple savings product for low- to moderate-income households without a retirement account. “And savings can be used for emergencies without penalty,” Grinstein-Weiss said.
Facilitate savings opportunities early in life. Grinstein-Weiss noted that her colleagues at CSD have built a body of evidence demonstrating the positive impact of starting early for financial success. In a large-scale study in Oklahoma, they found that providing newborns with 529 college savings improved mothers’ mental health and led to better social and emotional development at age 4.
“Based on this body of work, we recommend that policy should focus on creating long-term asset-building programs,” she said. States including Maine and Nevada already have established early, universal, opt-out programs for college savings, she noted.
“We have learned that Americans of all income levels can save if provided the right institutional mechanisms to do so,” Grinstein-Weiss concluded.