AutoSave is a unique savings plan that automatically diverts, through payroll deduction, a small amount of post-tax wages into an individual savings account. This new infrastructure near-seamlessly enables individuals to contribute small amounts of their pay into an accessible, non tax-advantaged savings account. It will be especially valuable for individuals who have limited liquid assets, and who may otherwise be forced to meet emergency needs with high-cost emergency loans. Savings that are fully under an individual’s control are valued as a form of self-insurance, a key ingredient in one’s sense of security, and as a personal safety net that can be tapped in the event of unanticipated expense. These are “flexible savings,” in contrast to savings that are restricted use (often by the tax laws), such as for retirement or for medical expenses. Currently no systematic savings program exists to intentionally encourage short-term flexible savings.
The Need for Non-Restricted Savings
Savings behavior is associated with positive asset-building behavior, increased asset holdings, and lower overall use of nontraditional and personal network sources of credit. For households with fewer resources, non-restricted savings can be especially powerful as a lifeline to weather financial downturns or as the initial building blocks of asset accumulation. Nationally representative surveys estimate that as few as 40 percent of Americans set aside funds for emergencies, with only half of these doing so through automatic and regular transfers from a checking account to a savings account. Recent survey research by the Center for Financial Services Innovation and the New York City Department of Consumer Affairs confirm that the underbanked consider saving for unexpected emergencies as the most important saving purpose or goal. A Consumer Federation of America (CFA) survey suggests that the average American family incurs approximately $2,000 in emergency expenses annually (for car repair, emergency dental or other household expenses). Middle-income workers, much like lower-income workers, also lack sufficient personal savings to weather a major disruption in income, defined as not being able to withstand a personal crisis such as job loss or major illness without a decline in standard of living.
The AutoSave Pilot
AutoSave utilizes a default mechanism to build savings into the payroll system, making the savings process automatic, flexible, and inclusive. The pilot, launched in the fall of 2009, is examining varied approaches to enrollment that leverage the power of default choices — simplified options with certain decisions already made on behalf of the employee, such as the type of account product and the suggested saving level. Importantly, the pilot is also exploring the feasibility of implementing a truly automatic enrollment design, in addition to the streamlined enrollment model currently being used.
The initial pilot seeks to examine the feasibility of the direct deposit mechanism with participation at a default, low contribution level. AutoSave streamlines account opening, minimizing the need for consumer decision-making or paperwork. Once initiated, savings deposits are made automatically by the employer each pay period, until the employee decides to stop, or separates from the employer. Contributions are made with direct deposit transfers, from take-home pay into AutoSave accounts. The federally-insured, low- or no-cost accounts will be structured to both encourage saving and not restrict access to funds. Workers have control of their savings, and are able to withdraw money at any time without penalty. The entire enrollment process is designed to minimize or eliminate common barriers to participation — including inertia, indecision about how and how much to save, concerns about the safety or accessibility of funds, and time-consuming enrollment steps.
In each AutoSave pilot site, an employer is collaborating with bank or credit union to design and implement an AutoSave plan. The five initial pilot employers include: A Southern California distribution warehouse for a national drugstore chain; a small nonprofit provider of vocational training and computer refurbishing; a for-profit school meal catering enterprise, recently expanded to four cities nationwide; and two large municipal employers, located on the east and west coasts. The initial 2009 pilot phase will offer AutoSave to between 70 and 2,100 employees in each of these workplaces. In addition, several more sites may be added to the pilot in late 2009.
The project will make a determination whether to expand to a full-scale demonstration and experimental evaluation in early 2010. An expanded evaluation would examine the value proposition of participation for the employee (does this automated mechanism aid management of finances, facilitate savings and improve financial stability), the employer (do the benefits of providing AutoSave outweigh the costs), and associated financial institutions, and financial and workplace intermediaries.
AutoSave Rationale
AutoSave is predicated on three principal rationales.
First, working households require non-restricted savings accounts to cover unanticipated expenses. Unlike most scaled saving programs, which focus on building retirement assets, AutoSave savings are intended to be fully liquid, and available to cover short-term needs. They may also potentially increase attachment to mainstream financial services or serve as building blocks to longer-term asset accumulation.
Second, applying a “default” choice will improve savings. AutoSave applies the most promising behavioral economics research that calls for the use of defaults to overcome emotional and psychological barriers that can stymie reaching savings goals. This research finds that people value current losses (such as less money in a paycheck) over future gains (savings with interest) and are prone to inertia — to continuing an action once started. By requiring participants to take action to stop saving once enrolled, AutoSave uses these tendencies to enhance saving behavior.
Finally, employers are uniquely positioned to facilitate a savings mechanism. The workplace is a promising asset-building delivery channel that has been underutilized to facilitate saving for non-restricted, emergency use. The AutoSave model has the potential to change this. AutoSave leverages existing infrastructure — direct deposit, and deduction mechanisms similar to those that automatically divert earnings to functions such as health insurance or retirement saving. Using payroll deduction to automatically divert post-tax wages would entail no complex tax rules or matching requirements, and can be easily adopted and implemented at low cost.
About Us
The New America Foundation is a non-partisan, non-governmental policy institute based in Washington DC. New America’s Asset Building Program is partnering with MDRC, a nonprofit, nonpartisan education and social policy research organization, to design and implement the AutoSave pilot.We seek for-profit employers, government agencies, non-profit organizations, and financial institutions as partners for a potentially expanded demonstration of AutoSave in 2010.
For more information, please contact: Caroline Schultz, 212-340-8866, caroline.schultz@mdrc.org, Pamela Chan, 202-596-3350, chan@newamerica.net.
This work is made possible by the generous support of the Rockefeller Foundation and the Charles Stewart Mott Foundation.
