Financial Security of American Households During the Pandemic
How different groups’ household finances fared--and what we can do to improve.
Editor's note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.
The coronavirus pandemic has both deeply altered our lives and become oddly routine. Numerous researchers from varying backgrounds have examined how it has shaped American households’ finances, providing empirical detail to what we’ve collectively experienced: Ashraf (2020) explored gyrations in the markets, Baek and others (2020) and Farrell and others (2020) studied broad unemployment and changes in the work habits of those employed, and Baker and others (2020) analyzed sharp decreases in many forms of spending.
But when it comes to why different groups fared poorly or well during the pandemic, the picture isn’t clear yet. To better quantify how the pandemic affected Americans’ household finances, we embarked on a joint research study with The Aspen Institute’s Financial Security Program, NORC at the University of Chicago, and the Defined Contribution Institutional Investment Association Retirement Research Center.
The resulting paper, “The COVID-19 Pandemic, Retirement Savings, and the Financial Security of American Households,” takes a close look at American households’ finances before and during this time of great disruption. The nationally representative survey, conducted in December 2020, included questions ranging from detailed account-by-account balances, to changes in income, to subjective well-being. We also detail clues on how America can improve the financial health and resilience of the population moving forward. Here, we share some of the key results.
Let’s start with something fundamental but often sadly overlooked: we all need emergency savings. Researchers have long advocated that families should set aside emergency savings to help them weather rough times, and they have repeatedly documented the lack of emergency savings among American households across the income spectrum.
Indeed, our study found that having emergency savings was a strong predictor of financial resilience: The amount of savings that a household had before the pandemic robustly predicted the household’s ability to manage its debt and pay its bills on time during the pandemic, even after controlling for income, age, and partnership status of the household.
Retirement savings, however, did not provide near-term financial stability in the same way--nor are they are designed to do so. Among households with workplace retirement accounts, the level of retirement savings had no discernable effect on the ability to manage debt or pay bills on time during the pandemic.
The Investment Company Institute notes that even during the pandemic, most plan participants did not withdraw or take loans from their workplace retirement accounts. Nevertheless, the percentage of people who did make a withdrawal or loan--though it is a relatively small group--roughly doubled in 2020 (to 12.6% from 6.8%), primarily because of participants using coronavirus-related distributions enabled by the Cares Act.
In addition, we found that emergency savings and retirement savings interact: When available, households appeared to prioritize using their emergency savings over their retirement savings. So, emergency savings appeared to protect against retirement withdrawals.
Not all debts appear to shape financial health equally. The 2019 data showed that student loan debt was a stronger driver of poor credit ratings than other factors such as age, income, and partnership status. Other, uncommon debts (like car loans) had a similar but smaller effect, raising the odds of reporting a poor credit rating by approximately 1.59; uncommon debts were also negatively associated with emergency savings.
We explored some additional angles in 2020: medical and payday debt. After controlling for other explanations, we found that medical debt is associated with a 69% lower emergency savings balance. We also found that payday debt is associated with a substantial drop, but the relationship is less robust. Similarly, after controlling for other explanations, we found that the debts most associated with poor financial health were medical debt (the strongest statistically significant relationship), credit card debt, and payday loan debt.
The pandemic also demonstrated pre-existing gaps in the financial health of American households, the latest in a long line of prior research on income and wealth differentials in the United States.
Here’s what we found:
These findings suggest a few clear lessons for the financial-services industry. A few of our results include:
With a better sense of the challenges that families have faced during the pandemic, we can look toward solutions. We know that policymakers and the private sector have actively worked on this, and these results should be seen as encouragement for further work in this area.
You can view a technical version of the paper, with detailed notes on the methodology and data analysis, in our archive.