The Right Context

Alison Cooke Mintzer (photo by Chris Ramirez)

The challenges to financial freedom for working Americans can seem insurmountable—but I think it’s important that we are realistic about framing the issues we confront. We’ve come to understand that it doesn’t really matter if we get people into their retirement plans automatically if they’re still spending money on payday loans and high-interest credit cards. Still, as many in the retirement industry have pointed out, sometimes we use the word “crisis” a little prematurely.

The challenge with overdramatizing the numbers is that it sometimes causes us to miss the whole picture. If I asked you how many people can’t pay a $400 emergency expense, would you say 40%? It’s likely that you might, because, since earlier this year, there have been a multitude of times that statistic has been cited.

Yet, it seems it was taken slightly out of context. My concern is that, by taking it out of context, we’re missing the opportunity to address it within a broader conversation.

Let me go back to the origin of the statistic. In May, the Board of Governors of the Federal Reserve System issued its “Report on the Economic Well-Being of U.S. Households in 2018.” The report is taken from responses to the sixth annual Survey of Household Economics and Decisionmaking (SHED), which surveys over 11,000 individuals around the nation about their financial challenges and opportunities.

Interestingly, when asked about their finances, 75% said they are either doing OK or living comfortably; in fact, half of employees surveyed got a raise or promotion the prior year. But, when asked about handling an unexpected expense of $400—think car repair or broken appliance—61% said they’d cover it with cash, savings or a credit card paid off at the next statement. That’s where the 40% comes in. But it doesn’t mean 40% wouldn’t pay it. Also, for comparison’s sake, in 2013, half of adults would have covered this unexpected expense with a cash equivalent—so progress has been made.

Most of the rest of Americans would borrow—the most common approaches include carrying a balance on credit cards (16%) and borrowing from friends or family (10%). Less than 10% each would: sell something (6%); use money from a bank loan or line of credit (3%); or use a payday loan, deposit advance or overdraft (2%).

Only 12% reported that they’d be unable to cover the expense at all. While as advisers, you know that many of those approaches are disadvantageous, for some who choose to carry an expense on a card or get help from family members, it doesn’t necessarily mean they don’t have the cash; perhaps they need it saved for something else.

I think what gets lost is potentially the more important statistic of who can’t pay their ongoing actual bills. As the report says, even without an unexpected expense, 17% of all adults expected to forgo payment on some of their bills in the month of the survey. Most frequently, this involves not paying, or making a partial payment on, a credit card bill. Four in 10 of those who can’t pay all of their bills—7% of all adults—said their rent, mortgage or utility bills will be left at least partially unpaid.

The emergency expense hits these people the most—another 12% of adults would be unable to pay their current month’s bills if they also had an unexpected $400 expense they had to pay. As an aside, the report did not clarify how these people responded to the hardship expense question.

Also, the report separated health care from “unexpected expense” and found that 25% of adults skipped necessary medical care in 2018 because they couldn’t afford the cost, and 20% had had major, unexpected medical bills to pay in the previous year.

Those who can’t pay their actual bills, I’d argue, are the bigger financial risk and are the financially stressed employees and Americans we hear about. That’s the number we should be targeting: Without getting them on track, they’ll never be financially stable, let alone able to retire. Financial wellness is still too often seen as something with “soft” measurements, but it’s a risk for plan sponsors not to address these stressed employees. Is 2020 the year you help your clients do a “financial risk” audit of employees to find that group, and target actionable items?