Lessons from COVID-19: The Need for a More-Holistic Approach to Saving that Protects Retirement

By Angela M. Antonelli

As the COVID-19 pandemic strains our healthcare system and brings the economy to its knees, the financial fragility of millions of Americans has been laid bare. The stark reality of how ill-prepared many are to weather any kind of short-term economic shock has become readily apparent.

Following the Great Recession of 2008, it is not clear much was learned, and it seems little was done to improve the long-term economic stability of America’s families and workers. Almost 40% of Americans still can’t easily cover an unexpected $400 expense — let alone a prolonged period with little or no income — and consumer debt stands at an all-time high.

As Congress and the White House craft economic stimulus packages to help businesses and workers weather the current economic storm, saving for retirement comes into play. It shouldn’t, but it does. Retirement accounts are the most-common type of savings and for some, it might be the only savings. For those fortunate enough to have retirement savings, policymakers have made it easy to access those accounts to help make it through tough times — but doing that puts retirement security at risk.

The current economic shock will only further deepen the retirement savings crisis, because far too many will likely turn to their retirement accounts just as they did in 2008. A decade after that financial crisis, families have only begun to return to their financial condition before that recession. For older Americans close to retirement or already retired, there may never be the opportunity to make up any losses.

This crisis offers another chance to help Americans become better prepared for unanticipated emergencies while improving and protecting long-term financial security. Retirement savings can make a difference, and all workers should have access to a way to save for retirement. However, we also must stop robbing long-term retirement security to address short-term financial needs. A young worker in their 20s or 30s who withdraws just $3,000 in retirement savings is potentially missing out on an additional $44,000 in retirement (assuming an interest rate of 7% for 40 years) and may have to work longer to make up that difference.

Will we finally take the opportunity, or will we once again squander it?

These six steps can go a long way toward helping to improve short-term financial stability while doing more to expand and protect long-term retirement security.

1. Encourage Employers to Engage with Employees about Financial Well-Being

Even before the current crisis pulled the rug out from under so many Americans, 59% of workers cited financial concerns as their top stressor, with nearly half finding it difficult to cover their monthly household expenses on time. Employers should address this by providing tools and information to help individuals understand how to balance short- and long-term needs and make better financial decisions. Easing the burden on employees will also help to improve productivity and worker retention.

2. Facilitate Emergency and Health Savings Accounts

The most immediate need to address in the wake of the unprecedented economic shutdown may be the lack of emergency savings for so many individuals and families. While such savings wouldn’t eliminate the need for substantial government assistance in a pandemic, savings of as little as $250 have been proven to reduce the likelihood of evictions, missed bill payments or the need for public assistance in more ordinary economic downturns. Health savings accounts also help ease the burden of unexpected medical expenses in the future, with 93 percent of such accounts carrying a positive balance from one year to the next. Employers and retirement plan providers can and should make it easier for workers to set aside portions of their paychecks to cover these important expenses.

3. Make It More Difficult to Accumulate Consumer Debt

As lenders and individuals became more cautious after the Great Recession of 2008, consumer debt decreased. In recent years, that trend has reversed and average household debt now stands at more than $14 trillion — nearly 12% higher than a decade ago. Student loan debt alone totals $1.56 trillion, and even before the current crisis, it was reported that as many as one in five of those borrowers is in default. While there has been a recent focus on helping workers to pay down student loans and other obligations, lenders and policymakers must take steps to make it much harder to accumulate so much debt in the first place.

4. Reduce Financial Exclusion for Low-Income Workers

Too many workers feel excluded by the current financial system and don’t use the tools that many of us take for granted. An estimated one in 13 U.S. households doesn’t have a checking or a savings account, often because they don’t trust banks or can’t afford minimum balances and fees. This exposes these individuals to predatory lenders and costly alternatives without access to the same benefits as most Americans. Adopting policies and practices to make financial inclusion a reality for lower-income populations decreases exploitation and increases economic stability.

5. Meet the Needs of a Changing Workforce

The growth of the “gig economy,” independent contractors, and the self-employed has brought greater flexibility for workers, but also exposed them to income instability, little or no job security, and the lack of access to common employer-provided benefits. Because many of these workers are suffering disproportionately in the current crisis, more must be done to help them save. Tying retirement plans to workers instead of their employers would enable them to move from job to job or gig to gig without sacrificing future savings, while financial technology (“fintech”) solutions could be leveraged to make saving and investing easier.

6. Expand Access to Ways to Save for Retirement

One half of the private sector workforce — as many as 55 million Americans — does not even have access to an employer-sponsored retirement savings plan. States have been hard at work in recent years to fill this void, creating simple retirement savings options that are easy for employers, especially small ones, to implement and convenient for workers to use. Oregon, Illinois, and California already have helped create 120,000 new accounts with more than $65 million in assets, and several other states are currently preparing to launch new programs. Congress also recently passed the SECURE Act, which provides incentives to encourage more small businesses to adopt retirement plans and facilitates the formation of multiple-employer plan arrangements. Together, these efforts are a good start, but it will be important to continue to assess progress being made to close the savings coverage gap and determine whether additional reforms will be needed to provide universal access to retirement savings accounts.

The Need for a More-Holistic Approach to Saving that Protects Retirement  

An important lesson from the coronavirus pandemic and its economic fallout is how important it will be to focus on building short-term financial stability to strengthen long-term retirement security. While we should stop making it easier to raid retirement accounts, we will only be able to accomplish this if policymakers, employers, the financial industry, and others come together to design a more-holistic approach to savings that recognizes the range of needs that individuals will experience over a lifetime.

We can’t keep allowing history to repeat itself. Without meaningful change, we will continue to pay now to rescue the economy and again in the future to cover the gap caused by those who either have no savings at all or are encouraged to raid what little retirement savings they do have to survive unanticipated financial shocks. We must not squander this opportunity to better prepare individuals, families, and workers for the future with tools to improve financial well-being, including expanding access to ways to save for emergencies, retirement, and much more.

Angela M. Antonelli is a Research Professor and Executive Director of the Georgetown University Center for Retirement Initiatives (CRI).

This piece was originally published on Forbes.com on March 31, 2020, and can be found here.

April 2020, 20-05