Cash-Strapped Americans Are Drawing Down Savings As Pandemic Divisions Widen
Survey shows one in four consumers pulled money from their savings in December, the most so far during the Covid age. Cash-Strapped Americans Are Drawing Down Savings As Pandemic Divisions Widen
The second round of stimulus checks can’t come fast enough for increasingly cash-strapped Americans.
One in four consumers pulled money from their savings in December, the most so far in the pandemic, according to a new survey from financial comparison website MagnifyMoney.
While men, colleague graduates and six-figure earners continued to add money to their savings, overall the proportion of those able to save anything dropped to 33% compared with 42% at the same time last year.
The data again highlights the increasingly divergent economic impact of the pandemic. While poorer Americans have depleted meager reserves and need new stimulus payments to survive, those who’ve kept their jobs and incomes have seen an unexpected windfall. For this cohort, the $600 checks represent an opportunity to buy stocks or treat themselves with new consumer goods.
Now, speculation is rising that the value of stimulus checks will increase to $2,000 as Democrats edge closer to Senate control in Georgia’s runoff elections.
U.S. Census data shows 87.6% of adults in households with incomes of $25,000 or less planned to use the previous round of stimulus checks — $1,200 per person — to simply meet expenses. By contrast over a third of adults in households with incomes above $75,000 reported that they would use the money to pay off debt or add to it to their savings.
Some of the savings drawn down in December may have been used to cover holiday spending, according to Matt Schulz, chief credit analyst at LendingTree, which owns MagnifyMoney.
“Many people are likely trying to overdo it a bit for Christmas to make up for a crummy year,” Schulz said. “It’s easy to understand, but that spending can really clobber your budget.”
The survey of 1,023 American consumers was conducted online by customer research firm Qualtrics Dec. 9 to 11.
Americans Hoarded ‘Mattress Money’ To Survive During Pandemic
People prefer keeping cash ready at hand when perceived risks are high.
Remember all the toilet paper people hoarded at the start of the pandemic? Turns out they hoarded cash and other easy money, too, and for the same reason: survival instincts.
Check out this chart, which shows how Americans reacted financially to the Covid-19 pandemic. They took money out of time deposits, such as certificates of deposit, and put more money into accounts that gave them faster access.
The numbers are derived from the Statistics on Depository Institutions Report of the Federal Deposit Insurance Corp.
The chart is inspired by Dan Geller, the founder of San Francisco-based Analyticom LLC, which applies insights from behavioral economics to how people make financial decisions. Geller uses the FDIC data to calculate a Money Anxiety Index, which he says shot up during the pandemic.
“This is hoarding. Mattress money. This is our defense and survival mechanism that tells us that we need to hoard food and wood and stay in the cave,” Geller says in an interview.
To measure liquid deposits, Geller combines demand deposits with two other types of deposits that the FDIC categorizes as non-transaction accounts, namely money market deposit accounts and “other savings deposits.”
I clustered the categories the same way to make this chart. The line for time deposits consists mainly of certificates of deposit, which pay more interest but carry a penalty for early withdrawal.
One obvious question is why there wasn’t more evidence of money anxiety in 2009. As the chart shows, money in time deposits actually rose from the first quarter of 2008 to the first quarter of 2009. Geller’s emailed response: “The financial crisis was a gradual recession because of the root cause of the crisis—subprime mortgages.”
Most of the defaults on subprime mortgages occurred in the years following the 2007-09 recession, he says. The pandemic downturn was shorter and sharper.
Another question is whether the FDIC data captures the behavior of individuals, since a lot of the deposits are controlled by businesses, not households. To Geller, that’s a distinction without a difference.
“That’s the biggest misconception in the world. Who do you think makes the decisions in a partnership or a corporation? People. At the end of the day we’re all people and human behavior is universal.”
The New Employer Benefit: Matching Emergency Savings
Pandemic has highlighted need for employees to have money set aside for a rainy day.
More employers are adding emergency savings accounts to employee benefit programs, reflecting a desire to attract and retain workers and help them better prepare for unexpected expenses.
Under way since before the pandemic, the trend has picked up steam in recent months, with companies encouraging employees to fund emergency accounts, in some cases by offering them cash and other incentives.
“Employers are aware that if you can’t cover your day-to-day expenses, you’re not going to save for long-term goals, such as retirement,” said Leigh Phillips, CEO of nonprofit SaverLife, which rewards users who participate in activities including savings challenges with chances to win prizes of as much as $10,000. Emergency savings, typically three to six months of expenses held in cash, is “the way to start someone with a saving habit.”
SaverLife’s 500,000 users include some who participate through employers. In July, KFC’s nonprofit KFC Foundation began offering workers up to $240 over six months to match contributions to an emergency savings account.
Employers are taking action, in part, because the pandemic “highlighted how unprepared many Americans are for financial emergencies,” said David Amendola, senior director at consulting firm Willis Towers Watson.
According to a recent Willis Towers Watson survey of 464 employers, 26% offer an emergency account in their retirement plan and 19% said they are likely to add them.
Responding to demand from employers, banks, nonprofits, startups and 401(k) record-keepers are launching workplace programs designed to help workers build emergency savings, often through payroll deductions.
Tom Finley, co-founder of Ascent Living Communities, which owns three senior living facilities in the Denver area, said now is “as tough a time as we have ever seen attracting and retaining staff.”
On Nov. 1, Ascent plans to introduce an emergency savings account from Sunny Day Fund Solutions Inc. with a company-funded interest rate of 17% to 36%, capped at $300 a year. “The longer you are tenured with us, the higher” the interest rate will be, he said.
Mr. Finley said three-quarters of the firm’s 300 employees, which include administrators, nurses, chefs and caregivers, are paid an hourly wage of $20 or less, which he says is “slightly above market.”
“I see the Sunny Day Fund as a complement to the 401(k) plan,” which attracts higher earners, he said. “My hope is that 80% to 90% of the employee base will contribute to either a 401(k) or the Sunny Day Fund.”
A growing number of companies, including United Parcel Service Inc., are letting workers divert a portion of their paychecks into rainy day funds within 401(k) plans. But due to legal and tax complications, many currently offer emergency savings programs outside the 401(k), using bank or brokerage accounts.
T. Rowe Price Group Inc. plans to introduce an emergency savings program later this year to the 5,900 employers that use it as a 401(k) record-keeper. Those choosing to participate will link their bank accounts to an app that transfers what it calculates they can afford to save, based on past spending patterns, to an FDIC-insured savings account. Employers generally won’t cover the fees on the accounts.
Others offering emergency savings programs include Fidelity Investments and fintech startup Secure Inc.
Social Finance Inc. launched an emergency savings program this summer in a workplace benefits program that is used by 900 employers. Employers generally pay the fees on the accounts and contribute an average of $50 per month through matching or incentive programs.
Giant payroll processor Automatic Data Processing Inc. is testing an emergency savings tool for clients using a paycard, according to a recent press release from BlackRock Inc., which is developing emergency savings programs with nonprofits, academics and companies.
Regulators have been eyeing ways to remove barriers that make it difficult for employers to automatically enroll workers into emergency savings accounts, something the 2006 Pension Protection Act did in 401(k) accounts. Due to the widespread adoption of automatic enrollment in workplace retirement accounts, employee participation has risen dramatically in recent years.
This month, Sen. Cory Booker (D., N.J.) introduced a bill to make it easier for employers to auto-enroll workers in emergency-savings accounts. (Workers would be able to opt out.) A bill sponsored by Sens. James Lankford (R., Okla.) and Michael Bennet (D., Co.) would allow workers one penalty-free annual withdrawal of up to $1,000 from a retirement account for emergency expenses. Employees would have to repay the money before taking another distribution.
The Consumer Financial Protection Bureau recently issued guidance employers can use to protect themselves against some liability when automatically enrolling workers in emergency savings accounts outside the 401(k).
Employers are responding to data that indicate workers are financially stressed.
The Federal Reserve in 2019 reported that 37% of adults lack the funds to cover a $400 emergency. Nearly a quarter of the 11,000 respondents to a November 2020 Federal Reserve survey said they were worse off financially than a year before. Those who were laid off and people with less education were more likely to have fallen behind.
Record-keepers to 401(k) plans report that about 6% to 8% of account owners raided their retirement savings in 2020, up from 2% in a typical year.
Employers say workers who are stressed about money are often less productive. Among the 464 employers Willis Towers Watson surveyed, 34% said financial stress is creating workforce challenges such as absenteeism, up from 26% in 2017.
Becky Dillon, 31 years old, said an emergency savings account she began funding in 2019 through a program sponsored by her employer, Alorica Inc., helped her family weather the recession. Ms. Dillon, who works for a call center in Bluefield, W.Va., said she initially hesitated to sign up. “I was like, ‘I don’t need that. I can save money on my own,’ until I remembered that I wasn’t saving.”
Ms. Dillon received a $20 deposit from her employer-sponsored program when she linked her bank account to the SaverLife platform.
She said she also received $240 in matching funds for saving about $600 over six months. The savings, which came in part from eliminating fast food and grew to about $1,000 before the pandemic, enabled her family to make ends meet when her husband, a mechanic, had his hours reduced.
Letisha Lamb, a senior human resources generalist at Alorica, said “a large majority” of the Bluefield workforce, which typically numbers up to 300, have participated in the savings program, which is available through a partnership with the call center’s client, Intuit Inc. She said 75% of participants have saved $500 or more.
Recently, Ms. Dillon amassed enough in her emergency account to purchase a computer.
“Even saving a little bit can soften the blow of unexpected expenses,” she said. “If I hadn’t been able to buy the computer, that would have put me into credit card debt and could have caused a big spiral downward.”
$2.7 Trillion In Crisis Savings Stay Hoarded By Wary Consumers
Consumers in Europe and the U.S. aren’t rushing to spend more than $2.7 trillion in savings socked away during the pandemic, dashing hopes for a consumption-fueled boost to economic growth on both sides of the Atlantic.
In the wake of lockdown easing during the northern hemisphere’s summer holiday season, excess savings in euro-area bank balances declined only marginally in August, and Italy still recorded an increase, according to calculations by Bloomberg Economics. In the U.S. there has also been no drawdown, the figures show.
The absence of a consumption surge that had been anticipated by some economists may speak against the prospect of a lasting inflation shock feared by central banks. While higher balances could help households cope with skyrocketing heating bills, tepid demand might temper businesses’ ability to push through permanent price increases.
“We’re not seeing any signs that the accumulated savings are coming back into the economy,” said Dario Perkins, managing director for global macro at TS Lombard in London. “Because people have these extra savings, they feel wealthy and they spend a bit more. A fraction of that money maybe gets spent, but it doesn’t come surging back.”
Bloomberg Economics calculates the total of excess savings built up since the crisis began at about $2.3 trillion in the U.S. and almost 400 billion euros ($464 billion) in the euro zone.
Although the European Central Bank has long cautioned the stock of money accumulated during lockdowns will remain “largely unspent,” corporate executives and economists were betting on a growth fillip.
What Bloomberg Economics Says…
“Households in the euro area have accumulated huge savings during the pandemic as spending plunged and governments supported incomes. While a consumption splurge looks unlikely for now, those savings will be a welcome buffer to some people as energy costs soar.”
–Maeva Cousin, Senior Euro-Area Economist
CaixaBank SA Chief Executive Officer Gonzalo Gortazar said in May that he expected some bunkered funds to fuel consumer spending. The OECD anticipated European consumption would benefit from “lifting of containment measures and the concomitant fall in households saving, which finances sizable pent-up demand.”
The data throw cold water on the theory of a broad-based rally.
European Commission sentiment gauges don’t indicate a boom in major purchases, and U.K. numbers also show consumers are cautious and unusually eager to save. In the U.S., the world’s biggest economy, consumer sentiment slumped during the summer.
Anecdotally, some spending did increase. Jeweler Pandora A/S said its U.S. business got a fillip from pandemic stimulus checks, while U.K. retailer Next Plc noted in September that “the combined effect of pent-up demand for clothing, record savings ratios, and far fewer overseas holidays” boosted sales, though the effect was likely to diminish.
Among reasons people have held on to their money are anxiety about resurgent outbreaks, the pace of the recovery and job prospects. Demographics and consumption patterns may also play a part.
Deutsche Bank AG analyst Olga Cotaga reckons that because people can’t recoup missed spending on services once a lockdown ends, that means they don’t consume enough to make a dent in their savings.
“We just get one haircut — we don’t get the amount of haircuts we missed during lockdown,” she said in a Sept. 21 podcast. “That pent-up demand that’s the backlog of all the decisions that you postponed during lockdown isn’t really there.”
Consumer preferences have also changed for good, according to an ECB paper that found many people realized during 2020 that they just didn’t miss certain things.
Some savings depletion is still helping to sustain the economic rebound, according to Karen Ward, chief market strategist in EMEA at JPMorgan Asset Management.
“The tail winds for demand are pretty strong,” she told Bloomberg Television. “I don’t think what we’ve seen so far is going to derail the recovery.”
Even so, shortages of goods amid a global supply squeeze mean that sometimes where there’s demand, money can’t be spent.
In suburban Minneapolis, financial adviser Mike Leverty says his affluent clients want to dip into savings to buy new cars or swimming pools, but can’t because of shortages of goods or labor.
“A client wants to do a kitchen remodel, but the contractors are booked for a year,” he said.
Finally, the vast pile of money also hasn’t accrued to all socio-economic groups equally. Seniors and the already wealthy have experienced the biggest gains — but they are often the least likely to spend.
“My sense is that much of that savings has accrued to upper middle income and upper income households,” said Mark Vitner, an economist at Wells Fargo & Co. “I think there’s still plenty of fuel in the tank.”
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