Emergency Savings and the Pandemic: Why COVID Has Actually Delayed the Growth of Workplace Emergency Savings | Millennium Trust Company

Emergency Savings and the Pandemic: Why COVID Has Actually Delayed the Growth of Workplace Emergency Savings

September 2, 2021
By Millennium Trust

Despite the Pandemic Saving Surge, We Need Emergency Savings Programs 

The COVID-19 pandemic underlined the importance of emergency savings in a way that few events could. Americans were unprepared for the financial shock that accompanied widespread layoffs, furloughs, and wage cuts. Many people did not have emergency savings. Forty percent of those who did tapped into those funds, spending half or more of their savings, according to a 2020 YouGov for Forbes Advisor survey 

Concerned employers began adding payroll-deduction emergency savings accounts (ESAs) to financial wellness programs. The value and importance of the new benefit was widely discussed within the financial services industry. And then, ironically, the adoption of workplace emergency savings programs and participation in the programs slowed because government intervention made it possible for Americans to save more than they had ever saved before.


Source: U.S. Bureau of Economic Analysis, Personal Saving Rate [PSAVERT], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PSAVERT, August 9, 2021.


In January 2020, the Personal Savings Rate (PSR) in the United States was 7.8%. By April 2020, it rose to the highest level ever – 33.7% – fueled by government largesse and the relaxation of rules around retirement plan distributions and plan loans.

The savings surge was fleeting. The last government stimulus check has been paid. Enhanced unemployment benefits end in September 2021. Already, the PSR has fallen to 9.4%. It’s time for employers who put workplace ESAs on hold to become proactive. ESAs are going to an essential benefit, helping Americans rebuild financial stability.  

Government programs and temporary retirement plan rules super-charged saving  

Extraordinarily high American savings rates resulted from a diversity of factor, according to an October, 2020 National Bureau of Economic Research (NBER) study. For instance, stay-at-home orders and business closures limited the availability of goods and services, so people had less opportunity to spend. However, government stimulus payments, enhanced unemployment benefits and, possibly, distributions from retirement accounts appear to have had the most significant impact on savings rates. 

Generous government stimulus payments. From 2020 to 2021, many Americans received several rounds of checks from the United States government. Each round of stimulus appears to have boosted the PSR. The spikes in PSR on the chart appear to coincide with stimulus payments. 

  • In March 2020, the CARES Act authorized payments of $1,200 per eligible adult and $500 per eligible child. The payments arrived from April through June of 2020.
  • In December 2020, the Consolidated Appropriations Act provided $600 per eligible adult and $600 per eligible child. The payments were made in January 2021.
  • In March 2021, the American Rescue Plan approved payments of $1,400 per eligible adult and $1,400 per eligible child. The payments were made in March and April 2021. 

If all three rounds of stimulus were received, a two-parent, two-child household with an income of less than $150,000 might have seen its bank account plumped by as much as $11,400. The amount was a windfall for Americans whose unemployment was not adversely affected by the pandemic, and a lifeline to those who were unemployed. 

The National Bureau of Economic Research (NBER) studied how people spent stimulus payments and discovered: 

  • 40% was spent, on average,
  • 30% was used to pay down debt, and
  • 30% was saved.  

Twenty percent of those receiving stimulus payments saved almost all of the money, while 40% spent almost all of it. 

Enhanced unemployment benefits. With the unemployment rate skyrocketing, Congress approved enhanced unemployment benefits. States had the option to offer an additional $600 in benefits per week to eligible individuals and/or make the payments available for more than 26 weeks. The first round of enhanced benefits ended in December 2020, although the program was extended and ends in September 2021. 

At $600 a week – about $15 an hour – enhanced unemployment benefits delivered more income than many workers were earning before suffering a pandemic-related job loss. The median wage in the U.S. was about $34,250 a year or $16.50 an hour in 2019. Half of working Americans earned less and half earned more. It’s likely that a significant number of households received more income from unemployment than from work. 

Government stimulus was critical during the pandemic. It helped households with higher incomes save more and pay down debt, and helped households with lower incomes afford food, rent, utilities, and other essentials, reported the U.S. Census Bureau. 

The support may prove to be double-edged. On the one hand, people who acquire savings –and experience the peace-of-mind that accompanies greater financial security – often choose to save more. On the other hand, stimulus may delay some Americans’ personal journeys toward financial literacy and greater financial security. 

Retirement plan loans and distributions. CARES Act rules temporarily waived distribution penalties and eased loan repayment rules for COVID-Related Distributions. A January 2021 Kiplinger’s survey reported that a significant percentage of respondents had taken loans (27%) or distributions (31%) from retirement plan accounts during 2020. More than half took $50,000 to $100,000.  

As the economy stabilizes, some Americans will need to rebuild their retirement savings. One way for employers to improve retirement outcomes is by offering workplace ESAs. People who have emergency savings are less likely to turn to their retirement savings when unexpected expenses occur. 

The Need to Save Has Not Changed 

It is too early to fully understand the impact of the pandemic and government stimulus on American’s overall financial health. However, one thing is certain. The need for emergency savings has not changed. Having three to six months of savings set aside to meet unexpected emergencies is the cornerstone of financial wellness. Despite temporarily elevated savings rates, Americans have not acquired the savings they need. In January 2021, a survey found that 40% of Americans would be unable to pay an unexpected bill of $1,000.  

The silver lining of the pandemic may prove to be its effect on attitudes toward saving. Every American who lost a job during the pandemic realized the importance of having money set aside, just in case. “As we emerge from the pandemic, many people want to be better prepared for the unknown. Forty-seven percent of people who didn’t have emergency savings before the pandemic said they plan to build their savings,” reported Lisa Rowan of Forbes Advisor. 

Warren Buffet once said, “Only when the tide goes out do you discover who has been swimming naked.” As stimulus recedes and enhanced unemployment benefits end, savings rates are likely to fall. Some Americans will find themselves with little or no savings and a high desire to save more.  

Employers with payroll-deduction emergency savings plans may find the benefit helps them attract new employees. In addition, workplace ESAs have the potential to help: 

  • Reduce employee stress levels,
  • Increase workplace productivity,
  • Raise retention levels,
  • Improve retirement outcomes,
  • Reduce retirement plan leakage, and
  • Foster employees’ financial literacy. 

Employers have an important role to play, helping employees stabilize personal finances and regain financial health. Emergency savings programs can be part of the effort. Helping employees save for emergencies can have a myriad of benefits for employers and employees. ESAs can be a win-win program that may never have been needed more.

The material in this Blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal, or tax advice. 

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