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
The AutoSave pilot is testing two different program designs. The first program design, started in fall 2009, is the "opt-in program" where employees must sign up for the AutoSave savings program through their employer. Employees who do not have a savings account are able to open one through a bank or credit union that is partnered with the workplace site. With this version of the program design, only the savings deposits are automatic. The second program design, expected to launch in 2012, is the "opt-out program" where all employees will be automatically enrolled in the AutoSave savings program unless they select not to be in the program. The opt-out program is currently under development and will utilize a reloadable prepaid card with an attached savings product. With this design, both enrollment and deposits are automatic.
AutoSave Pilot Participants
To date, the opt-in AutoSave program design has been offered to all employees at eight workplace sites – organizations ranging in size between 13 and 25,000 employees. The project has a special focus on generating participation among low-to moderate-income workers. The pilot employers included:
- a distribution warehouse for a national drugstore chain;
- a small nonprofit provider of vocational training and computer refurbishing;
- a for-profit school meal catering enterprise;
- a small, for-profit light industrial employer;
- a mid-sized health care;
- a nonprofit provider of services to adults with developmental disabilities; and
- selected departments of two large municipal employers.
Also, each workplace site was partnered with a bank or credit union that offered federally insured, low-or no-cost savings accounts to AutoSave participants. The accounts were structured to both encourage saving and avoid penalizing participants who access funds when the need arises.
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.
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[at]mdrc.org, Pamela Chan, 202-596-3350, chan[at]newamerica.net.
This work is made possible by the generous support of the Rockefeller Foundation and the Charles Stewart Mott Foundation.