The pandemic has shown a light on financial issues that need
to be addressed by policy makers in the U.S., according to a Morningstar report
released today.
The impact of the pandemic on American’s finances is complex
and unequal, according to the report, “The Covid-19 Pandemic, Retirement
Savings, and the Financial Security of American Households.” Morningstar
partnered with the Aspen Institute’s Financial Security Program, a research
organization at the University of Chicago, and the Defined Contribution Institutional
Investment Association to compile the report.
“When we look at the financial impact of the pandemic on
American households, the picture that has emerged is complex,” the report
states. “Some families have been hit hard and have yet to recover, while others
are clearly better off than they were before Covid-19. ... The pandemic
provided a shock to people’s financial lives, and in that shock, we can learn
who had adequate support and preparation, who didn’t, and why.”
Morningstar offered policy changes that need to be made to
make such situations less harmful and more equal among various segments of the
population.
Americans need to be encouraged to set aside emergency
savings, the report said. “Emergency savings were instrumental in helping households
face the financial storm of the pandemic, but an emergency saving fund cannot
help if it does not exist. There are strong differences across ethnic and
racial lines in access to and use of savings vehicles, with Black households
being most likely to be unbanked altogether, even after accounting for income
differences,” Morningstar said.
In addition, policies that increase retirement savings among
low-income households would decrease the racial gap that now exists in
retirement savings.
Policies need to be established to help decrease student
debt and medical debt, which appear to be clear warning signs of financial
trouble, the report said. “Low-income households had the highest ratio between
student debt and income, suggesting the necessity for a lifeline to help these
households pay their debt,” the report said.
Workplace benefits known as “sidecar savings,” which are
emergency savings vehicles added to workplace retirement programs, “are both
increasingly popular and potentially valuable tools to help Americans weather
financial storms,” the report said.
The study found that most American households did not dip
into their retirement savings for loans or withdrawals during the pandemic, but
the number who did increased to an estimated 12.6% in 2020 primarily due to
coronavirus-related distributions enabled by the CARES Act. Loosened retirement
withdrawal rules roughly doubled the probability of withdrawal where the new
CARES Act rules were known and applied, Morningstar said.
The pandemic focused attention on financial gaps based on
income or race that already existed. “African American households showed low
emergency and retirement savings both before and during the pandemic [and]
Hispanic Americans were especially likely to report they were worse off because
of the pandemic,” the report said.
The report noted, “In an unexpected bright spot, we observed
a major decrease in unbanked Black households. Black households that possessed
neither a checking nor a savings account dropped to 12% in 2020 from 18% in
2019. Black households without a workplace retirement savings account also
dropped to 48% in 2020 from 61% in 2019.” Morningstar said additional research
is needed to determine the cause behind the decreases.
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