Reversing the Negative Savings Rate

By now it’s no secret that for the first time since the Great Depression, the national savings rate is negative. Yes, that means that overall, Americans now are spending more than they earn. With tax day looming on the horizon, thoughts turn to what kinds of incentives might work best to help Americans build their assets, and to reverse this negative savings rate.

Recently, the IRS started allowing tax refund splitting, which allows taxpayers to direct part of their refunds into “money to save” and “money to spend.” The attraction of tax-splitting is obvious: for many low-income Americans, the refunds they receive are hundreds of dollars more than their average paycheck, providing an annual windfall that can be partially used to build assets. In 2005, Harvard Business School and the University of Kansas undertook a study to research the potential power of tax-splitting to increase savings among low-and moderate-income families in Oklahoma. They found that of their research subjects, 20% chose to split their refunds, open new savings accounts, or both. These participants saved 47% of their refunds, and those with existing savings saw them increase by 90%, while the three-fourths of participants who were brand-new to saving established savings accounts for the first time.

This year, the IRS will start allowing families to designate up to three different accounts into which Americans can deposit their money. However, tax-splitting is still not available to most Americans at a state level, California and the pilot Okalahoma program being the exception. Expanding tax refund splitting options at a state level will encourage families to build even more assets.

Another unique savings incentive tied to tax refunds has been proposed by the New American Foundation, which suggests that California directly allow taxpayers to purchase savings bonds with their refunds.

The wonderful thing about both of these proposals is that they are not lightening rods for partisan controversy. What is missing is merely the pressure, political will and momentum to make them happen.

Amanda Levinson | Director of Policy Programs

Wage Insurance–An Incentive or Race to the Bottom?

One of the hot topics making the rounds in the policy world is wage insurance. The idea is relatively simple: permanently displaced workers should be insured against wage loss when they are reemployed at a lower rate. According to Lael Brainerd of the Brookings Institute, workers who are permanently displaced earn an average of 16 percent less when they find new employment. That number is even higher for laid-off manufacturing workers, whose earnings can drop by 20 percent.

Most wage insurance proposals making the rounds call for a program that would replace 50 percent of a workers’ lost income for two years, capped at a maximum of around $10,000 per year. The idea has been gaining momentum as an innovative way to expand the safety net for displaced workers and as a wider-reaching alternative to programs like Trade Adjustment Assistance, which has been criticized for being ineffective and too narrow.

While it would seem that such an idea would have widespread support among Democrats, the idea is not without its critics, even in progressive circles. According to the New York Times, organized labor and groups like the Economic Policy Institute and the National Employment Law Project are opposed to wage insurance on the grounds that it is a poor substitute for expanding unemployment insurance, and could encourage companies to offer displaced workers lower-paying jobs. Meanwhile, conservative groups like the Heritage Foundation have in the past supported the idea of wage insurance since it provides incentives to workers to find new employment quickly.

Both sides have a point. Encouraging workers to get back to work as quickly as possible following a lay-off is good for them, their communities, and the economy. But if the only jobs available are low-wage, and if the wage insurance runs out after two years, some workers may ultimately be left off in a worse position than when they started.

A holistic approach to supporting displaced workers will focus both on their short-term needs—wage and job replacement, as well as consider how training programs could retrain workers for jobs in industries that have similar pay scales. Rather than approaching the two ideas as a trade-off, how can we meaningfully both expand the safety net for workers while transitioning them into higher-paying, higher-skilled jobs?

Amanda Levinson | Director of Policy Programs