Mensah: Help to Restore Workers’ Sense of Financial Security

Posted May 14, 2009 at 2:11pm

As we begin to take stock of the damage caused by the financial crisis, one thing is clear: The American workers’ sense of financial security has been dealt a devastating blow.

For many workers, job loss has led to lost benefits, foreclosed properties and an inability to provide for their families. For many more, modest retirement nest eggs, accumulated over years of saving and investing, have disappeared almost overnight, leaving their prospects for a secure retirement dim. No matter where you look, it is hard to not see the drastic toll the past 18 months have taken on the financial security of the American family.

Yet the current economic downturn has also exposed an inconvenient truth about Americans’ financial security — one that has been lurking in the shadows for years.

Financial Insecurity: A Chronic Condition

The financial security of many Americans was living on borrowed time — and borrowed money. For decades, the United States has not been a nation of savers. Although the recent onset of financial insecurity might seem sudden, it is not surprising.

The root of the problem is an American system for saving and investing that poorly serves many American workers. Disproportionate tax incentives for those in higher income brackets benefit individuals who would save even without the government’s helping hand. Moreover, the existing savings system is a confusing patchwork of savings plans, far too complex for easy, universal use.

Research has documented a “wealth gap— that points to an extremely uneven distribution of assets in America today, with the majority of wealth being held in the top income quartile of the population. A closer look at the data also reveals an “investment gap— between lower- and higher-income savers, which adversely affects both the long-term financial security and financial opportunity of lower-income savers. Shockingly, it is estimated that one in four Americans do not even have a simple checking account, let alone a retirement or savings account.

More and more working families have been left behind, without the financial tools or know-how to save and build the wealth that will increase their financial security.

Savings for America and the American Worker

In my 13 years at the Ford Foundation, I was privileged to support strategies that were able to move forward people and places that were economically struggling. I came to see the power of strategies that helped individuals step up the economic ladder to a higher rung of prosperity and opportunity. I saw the power of helping people save money, with these savings doubled or tripled with matching money, so that they could afford a down payment on a first home, pay for college-level training, purchase vital business assets or secure their first retirement account. These assets offered a new layer of financial security to wage income. These assets were a true step up to a better paying job, to more earnings from a business or to a future way to finance long-term needs.

Exploring these links between individual savings, matching incentives and simplified financial tools has been the mission of the Aspen Initiative on Financial Security for the past six years. And for good reason.

Saving is key for the long-term economic health of the American worker. On the individual level, it is the accumulation of savings and assets that fosters household financial stability, creates economic mobility and provides the ladders of opportunity for individuals to climb into and remain a part of the middle class. Research has shown that families with greater assets tend to own homes in better neighborhoods for longer periods of time, affording children better and more consistent educational opportunities and resources. Higher levels of assets have also been shown to promote self-confidence, self-sufficiency and civic engagement.

In macroeconomic terms, without saving, there is no domestic money for domestic businesses to borrow and invest, to increase capital, and at the end of the day to increase productivity — all of which, in turn, lead to more job opportunities, higher wages and higher standards of living.

Current market conditions run the risk of driving savers out of the equity markets for years. Assuring consumer confidence in investing again, structuring a universal, simple system of saving that is more inclusive, secure and fair, and creating the proper incentives to elicit better saving behavior has never been more important, both for individuals and the economic health of our country.

Moving Forward

It is now time to reinvent our savings system. We need a renewed focus on where the money goes and how the money grows. We at Aspen IFS believe that a new system of saving is needed that delivers on five guiding objectives: 1) Lifelong; 2) Universal; 3) Simple; 4) Incentivized; and 5) Widely Marketed. Fundamental reform will solve the root causes of our financial insecurity by providing us with easy, robust, safe financial savings plans that build financial security beginning at birth.

If we do not address the American work force’s financial insecurity, the future economic health of the United States itself is in jeopardy.

Lisa Mensah is executive director of the Aspen Institute Initiative on Financial Security.