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Why Don't Americans Save More Money?

Many Americans are just one financial shock away from financial hardship.
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(Photo: Africa Studio/Shutterstock)

(Photo: Africa Studio/Shutterstock)

Financial shocks happen—cars break down, pipes burst, companies downsize, pets get sick. Data from the Pew Survey of American Family Finances, presented in a three-part series on financial shocks, suggests that 60 percent of American households experienced some kind of financial shock within a 12-month window; 32 percent of households reported experiencing more than one shock. For over half of the affected families in the data set (which surveyed 7,800 American households), these shocks were categorized by Pew as "destabilizing"—they made it difficult to make ends meet.

Despite the ubiquity of financial shocks, few American families are prepared for them—only 41 percent of households in the survey had $2,000 of liquid savings on hand (the cost of the median household's priciest financial shock).

"More than half of households (54 percent) could not replace one month's income using their liquid savings," concludes the second Pew brief. "Over a quarter of households do not have enough liquid savings to replace even one week of income."

When it comes to retirement savings, people choose the default option, or the "path of least resistance."

While low-income families are, unsurprisingly, generally worse off, even high-income families lack sufficient emergency savings. The Pew Center's research indicates that 25 percent of high-income households have "less than 13 days' worth of income in liquid savings." Meanwhile, 25 percent of households making less than $25,000 a year have no liquid savings at all, and the typical household in this income bracket has only six days' worth of income in liquid savings.

The Pew data also confirms what we already know about the racial wealth gap, as there was a substantial racial barrier in both liquid savings and overall financial assets among the households in the sample. "By liquidating all of its financial accounts, the typical white household could replace almost 10 months of income, while the typical Hispanic household could replace slightly more than one month, and the typical black household could replace only 23 days," the report reads. "A quarter of black households would have less than $5 if they liquidated all of their financial assets."

Still, these financial shocks have long-term consequences for families across the income bracket. All households who reported experiencing a financial shock in the 12 months before the survey had less savings, higher credit card debt, and were more likely to also report a financial shortfall than families who hadn't experienced a shock.

"This finding suggests that the perceived destabilizing effects of shocks may ripple into other areas of a family's finances and result in ongoing shortfalls and financial stress," the authors of the report write. "It also reveals how close many households may have been, and may be in the future, to serious difficulty, such as being unable to pay rent or a mortgage."

It's easy enough to imagine why a household making less than $25,000 a year might struggle to save, but why are so many upper-income households one blown transmission away from being unable to pay their mortgages? It's not that people don't want to save—57 percent of participants in the Pew survey said people should have at least six months of expenses saved (which is in line with what financial experts also suggest). Yet only 20 percent of the households surveyed actually had such a cushion.

What's to be done? While behavioral science has revealed the extent to which actual human beings deviate from traditional economic models, most financial products have failed to incorporate this research into their design. Applying the tenets of behavioral science to emergency saving might help households accumulate a cushion, the Pew Center suggests in its final brief.

Economists have determined, for example, that, when it comes to retirement savings, most people choose the default option, or the "path of least resistance." In light of this research, behavioral scientists have called for initiatives that change the default option and automatically enroll people in payroll deduction retirement savings plans (uninterested people can opt out). To be sure, a growing number of states are now experimenting with such plans.

In addition to advocating for the creation of simpler, more transparent financial products, the Pew report suggests that emergency saving could also be automated: "[W]hen newly hired workers set up their payroll withholdings, the default option could be to divert some portion of their paychecks to savings. Under this system, a person who takes no other action would build a cushion of accessible, flexible savings, as has been shown to work in some retirement savings programs."

Smarter savings products won't solve all the problems facing low-income households who wish to save more, but they're a solid first step toward increasing the financial stability of households across the income spectrum.