Financial Security of American Households During the Pandemic
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The coronavirus pandemic has both profoundly altered our lives and become oddly routine. Many scholars from a variety of backgrounds have examined how this has shaped American household finances, providing empirical details of what we have collectively experienced: Ashraf (2020) explored market fluctuations, Baek and Others (2020) and Farrell and others (2020) studied widespread unemployment and changes in the work habits of those employed, and Baker and Others (2020) analyzed the sharp declines in many forms of spending.
But when it comes to why different groups have behaved badly or well during the pandemic, the situation is still unclear. To better quantify the impact of the pandemic on US household finances, we launched a joint research study with the Aspen Institute’s Financial Security Program, the University of Chicago’s NORC, and the Center for Research on the Defined Contribution Institutional Investment Association retreat.
The resulting article, “The COVID-19 Pandemic, Retirement Savings, and Financial Security of American Households,” takes a close look at American household finances before and during this time of great disruption. The nationally representative survey, conducted in December 2020, included questions ranging from detailed account-by-account balances, changes in income, to subjective well-being. We also detail clues about how America can improve people’s financial health and resilience in the future. Here we share some of the key findings.
The Role of Retirement and Emergency Savings in Financial Security
Let’s start with something fundamental but often sadly overlooked: we all need emergency savings. Researchers have long advocated that families should set aside emergency savings to help them through tough times, and they have repeatedly documented the lack of emergency savings among American households at all income levels.
Indeed, our study found that having emergency savings was a strong predictor of financial resilience: the amount of savings a household had before the pandemic robustly predicted household ability to manage debt and pay bills on time during the pandemic, even after controlling for household income, age and marital status.
Retirement savings, however, have not provided short-term financial stability in the same way, and are not designed to do so. Among households with workplace retirement accounts, the level of retirement savings had no discernible effect on the ability to manage debt or pay bills on time during the pandemic.
The Investment Company Institute notes that even during the pandemic, most plan participants have not withdrawn or taken out loans from their workplace retirement accounts. Nonetheless, the percentage of people who have made a withdrawal or loan – although a relatively small group – has roughly doubled in 2020 (to 12.6% from 6.8%), mainly due to participants using coronavirus-related distributions enabled by the Cares Act.
Moreover, we found that emergency savings and retirement savings interact: when available, households seem to prioritize the use of their emergency savings over their retirement savings. Thus, emergency savings seemed to protect against retirement withdrawals.
Household finances through the lens of race, income and debt
Not all debt seems to shape financial health in the same way. Data from 2019 showed that student loan debt was a bigger driver of bad credit than other factors like age, income and partner status. Other uncommon debts (such as car loans) had a similar but smaller effect, increasing the likelihood of reporting a bad credit score by about 1.59; rare debt was also negatively associated with emergency savings.
We explored a few more angles in 2020: medical debt and payday debt. After controlling for other explanations, we found that medical debt is associated with a 69% lower emergency savings balance. We also found that payday debt is associated with a substantial decline, but the relationship is less robust. Similarly, after controlling for other explanations, we found that the debts most associated with poor financial health were medical debt (the strongest statistically significant relationship), credit card debt, and loan debt. on salary.
The pandemic has also exposed pre-existing gaps in the financial health of American households, the latest in a long line of previous research on income and wealth gaps in the United States.
Here is what we found:
- Non-Hispanic (“White”) European American respondents reported higher household income, retirement savings, and emergency savings than non-Hispanic (“Black”) African-American and Hispanic (“Hispanic”) American respondents. “). However, we found that the difference in retirement savings narrowed slightly between 2019 and 2020. On all measures, Hispanic respondents reported numbers between those of black and white respondents.
- Black households were the least likely to have a 401(k) or similar account. Among families that had workplace retirement savings accounts in 2019, the median black respondent held about 22% of the median retirement savings of white respondents, and the median Hispanic respondent held about 36% of the median retirement savings of white respondents.
- Higher retirement savings at work, emergency savings, and overall financial health are strongly correlated with income. The effects are evident at all income levels, but especially for low-to-moderate income, or LMI, families, defined as those earning less than $50,000 a year. In 2019, for every dollar that non-IMT households had in emergency savings, those IMT households had just $0.06. Emergency savings increased across all income brackets between 2019 and 2020, and the gap narrowed slightly: in 2020, IMT households saved $0.08 for every dollar saved by non-IMT households.
- The new accounts are an unexpected bright spot in terms of racial/ethnic and income differences in financial security. Historically, a much larger proportion of black households are unbanked (without a checking or savings account) than are Hispanic and white households; according to our data, the rates were 18%, 7% and 5% respectively. This gap narrowed significantly in our analysis: to 12% for black respondents and 5% for Hispanic and white respondents. Likewise, we saw impressive growth in new workplace retirement accounts among Black and Hispanic respondents. These results need to be followed by further research using administrative data from banks and archivists, in addition to self-reported data from this survey, but they are very promising.
What can we do to improve financial security?
These results suggest some clear lessons for the financial services industry. Here are some of our results:
- Shadow savings – emergency savings vehicles added to workplace retirement programs – are both increasingly popular and, based on our research on emergency savings in general, potentially valuable tools to help Americans weather financial storms. Emergency savings appear to shield traditional workplace retirement programs from the need for loans.
- Targeted benefits and products to help those with student debt and medical debt, in particular, can impact employees’ overall financial health and their ability to save for the future.
- Low-income and minority groups who do not save may have the desire but not the ability to save for retirement. Low-income households and black households were the most likely to become “new” retirement account owners, suggesting that the current gap in account ownership is not a fixed, unchanging fact.
With a better sense of the challenges families have faced during the pandemic, we can look for solutions. We know that policymakers and the private sector have been actively working on this, and these results should be taken as encouragement to continue work in this area.
You can view a technical version of the article, with detailed notes on methodology and data analysis, in our archives.