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Financial Security of American Households During the Pandemic

How different groups’ household finances fared--and what we can do to improve.

Editor's note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

The coronavirus pandemic has both deeply altered our lives and become oddly routine. Numerous researchers from varying backgrounds have examined how it has shaped American households' finances, providing empirical detail to what we've collectively experienced: Ashraf (2020) explored gyrations in the markets, Baek and others (2020) and Farrell and others (2020) studied broad unemployment and changes in the work habits of those employed, and Baker and others (2020) analyzed sharp decreases in many forms of spending.

But when it comes to why different groups fared poorly or well during the pandemic, the picture isn’t clear yet. To better quantify how the pandemic affected Americans’ household finances, we embarked on a joint research study with The Aspen Institute’s Financial Security Program, NORC at the University of Chicago, and the Defined Contribution Institutional Investment Association Retirement Research Center.

The resulting paper, "The COVID-19 Pandemic, Retirement Savings, and the Financial Security of American Households," takes a close look at American households' 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, to changes in income, to subjective well-being. We also detail clues on how America can improve the financial health and resilience of the population moving forward. Here, we share some of the key results.

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 weather rough times, and they have repeatedly documented the lack of emergency savings among American households across the income spectrum.

Indeed, our study found that having emergency savings was a strong predictor of financial resilience: The amount of savings that a household had before the pandemic robustly predicted the household’s ability to manage its debt and pay its bills on time during the pandemic, even after controlling for income, age, and partnership status of the household.

Retirement savings, however, did not provide near-term financial stability in the same way--nor are they are designed to do so. Among households with workplace retirement accounts, the level of retirement savings had no discernable 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 did not withdraw or take loans from their workplace retirement accounts. Nevertheless, the percentage of people who did make a withdrawal or loan--though it is a relatively small group--roughly doubled in 2020 (to 12.6% from 6.8%), primarily because of participants using coronavirus-related distributions enabled by the Cares Act.

In addition, we found that emergency savings and retirement savings interact: When available, households appeared to prioritize using their emergency savings over their retirement savings. So, emergency savings appeared to protect against retirement withdrawals.

Household Finances Through the Lens of Race, Income, and Debt

Not all debts appear to shape financial health equally. The 2019 data showed that student loan debt was a stronger driver of poor credit ratings than other factors such as age, income, and partnership status. Other, uncommon debts (like car loans) had a similar but smaller effect, raising the odds of reporting a poor credit rating by approximately 1.59; uncommon debts were also negatively associated with emergency savings.

We explored some additional angles in 2020: medical 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 drop, 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 payday loan debt.

The pandemic also demonstrated pre-existing gaps in the financial health of American households, the latest in a long line of prior research on income and wealth differentials in the United States.

Here’s what we found:

  • Non-Hispanic European American ("White") respondents reported higher household income, retirement savings, and emergency savings than non-Hispanic African-American ("Black") and Hispanic American ("Hispanic") respondents. However, we found that the difference in retirement savings shrunk slightly between 2019 and 2020. On all measures, Hispanic respondents reported numbers between that 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 approximately 22% of the median white respondent retirement savings, and the median Hispanic respondent held about 36% of the median white respondents' retirement savings.
  • Higher workplace retirement savings, emergency savings, and overall financial health are strongly correlated with income. The effects are evident across income levels, but especially for low to moderate income, or LMI, families--defined as those earning less than $50,000 annually. In 2019, for every dollar that non-LMI households had in emergency savings, those LMI households had just $0.06. Emergency savings grew across income groups between 2019 and 2020, and the discrepancy decreased slightly: In 2020, LMI households had $0.08 saved for every $1 that non-LMI households saved.
  • New accounts are an unexpected bright spot in terms of both 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. That gap shrank considerably in our analysis: to 12% for Black respondents and 5% for both Hispanic and white respondents. Similarly, we saw an impressive growth in new workplace retirement accounts among both Black and Hispanic respondents. These findings need to be followed up by further research using administrative data from banks and recordkeepers, in addition to the self-reported data from this survey, but they are very promising.

What Can We Do to Improve Financial Security?

These findings suggest a few clear lessons for the financial-services industry. A few of our results include:

  • Sidecar savings--emergency savings vehicles added on to workplace retirement programs--are both increasingly popular and, based on our research on emergency savings generally, 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 individuals with student and medical debt, in particular, may have spillover effects on overall employee financial health and the ability to save for the future.
  • Nonsaving low-income and minority groups may have the desire but not the ability to save for retirement. Both low-income and Black households were most likely to become "new" retirement account owners, suggesting that the current gap in account ownership is not a fixed, immutable fact.

With a better sense of the challenges that families have faced during the pandemic, we can look toward solutions. We know that policymakers and the private sector have actively worked on this, and these results should be seen as encouragement for further work in this area.

You can view a technical version of the paper, with detailed notes on the methodology and data analysis, in our archive.

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About the Authors

Stan Treger

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Stan Treger is a behavioral scientist at Morningstar.

Steve Wendel

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Steve Wendel is head of behavioral science for Morningstar, where he leads a team of behavioral scientists and practitioners who conduct original research to help people invest and manage their money more effectively. Before assuming his current role in 2015, he was principal scientist for HelloWallet, a company that specializes in web and mobile financial wellness programs, where he studied savings behavior and coordinated the research efforts of HelloWallet’s advisory board. Morningstar owned HelloWallet from 2014 to 2017.

His latest book, Improving Employee Benefits, shows HR practitioners how they can use behavioral economics to help employees to take action on their benefits. In 2013, he published Designing for Behavior Change, which describes HelloWallet’s step-by-step approach to applying behavioral economics and psychology to product design.

Wendel holds a bachelor’s degree from the University of California, Berkeley, a master’s degree from The Johns Hopkins University School of Advanced International Studies, and a doctorate from the University of Maryland, where he analyzed the dynamics of behavioral change over time.

Wendel is also the founder of the Action Design Network, a nonprofit organization that teaches members how use behavioral economics and psychology in product design. The network hosts more than 5,000 behavioral practitioners at events around the country, including the annual Design for Action Conference. Follow Steve on Twitter: @sawendel

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