Universal savings accounts could help struggling Americans

After pandemics and economic recessions, people tend to save a little more than they did before, to better prepare for future unknowns. To make savings a little easier, a new idea is gaining popularity: Universal savings accounts. USAs would help every American save for a rainy day, save to start a business or save to grow their family.

In the next coronavirus package, Congress should create an all-purpose savings account that would allow individuals to save for things other than just retirement, education and health care.

The existing system of savings accounts is designed for Americans who are wealthy enough to save for specific purposes and financially secure enough to know that their plans won't change. USAs provide another option, allowing families to save for the unknowns in life, without government-imposed strings attached and without being penalized by the tax code.

According to a new report from Congress's Joint Economic Committee: "USAs would assist families as they pursue their own savings goals throughout life." They also note how additional savings promotes social capital — the networks of relationships and associations in society that bind us together — "whether it is used to start a family, to surround children with supportive neighbors or to shore up institutions of civil society."

The National Coronavirus Recovery Commission, or NCRC, also recently recommended USAs as a critical policy for reducing the financial risks of future pandemics by allowing more Americans to save for future unknowns.

The U.S. tax code currently discourages the economic and social benefits of saving by taxing savers more heavily than individuals that spend their paychecks immediately. This savings disadvantage is lifted for specific government-approved savings goals, like employer-sponsored 401(k) retirement accounts and state-sponsored 529 education savings plans.

Government-approved saving accounts fail to meet the evolving needs of many lower-income and middle-class Americans. Low-income savers are 31% more likely to face additional tax penalties for improperly withdrawing their money during a personal financial crisis.

Complicated rules and high penalties for misusing government-earmarked savings discourage the use of the existing system.

A USA could provide the same savings protections available today, but without all the complicated strings attached. A single, simple and flexible account would help more families build financial security.

Individuals should be allowed to contribute at least $10,000 in post-tax earnings to their USA each year, and all withdrawals would be excluded from taxable income so that all accrued earning would be tax-free. The savings could be used at any time for any purpose.

Congress implicitly recognizes the failure of single-purpose savings accounts after almost every major natural disaster, by allowing affected Americans to draw on their retirement savings penalty-free.

In the Coronavirus Aid, Relief, and Economic Security Act passed in March, Congress suspended restrictions on using retirement funds for pandemic emergencies. They also waived requirements that would have forced some retirees to liquidate their investments at the bottom of the stock market crash.

These were sensible changes. But instead of addressing each crisis with an exception to the normal rules, Congress should create an all-purpose savings account to "help Americans build a personal rainy day fund so that they can better weather the risks of a future economic or health crisis," as the NCRC explains.

Similar accounts have succeeded in promoting saving around the world. The United Kingdom and Canada pioneered the model of simple, flexible savings accounts to help more people save for their own priorities.

Forty percent of all households in Canada have saved money in these accounts, and more than half of those households are low-income savers. Forty-three percent of British adults hold an account, and similar to Canada, 50% of account holders earn less than 20,000 pounds sterling (about $26,000).

In future economic downturns, USAs would be particularly helpful for the lower-income workers who are often most affected by business closures and layoffs. Even with benefits like unemployment insurance, delays in processing are all too common in times of high applications. USAs can tide people over without becoming delinquent on other payments or relying on high-interest credit card debt or payday loans.

Lower-income individuals in Canada are more than twice as likely to have a USA-style account as opposed to a more restrictive retirement savings account.

When you tax something, you get less of it. Similarly, when you make something more complicated, you discourage its use. The current savings system does both; it overtaxes savers and enforces numerous complicated rules on those savers who can take advantage of government-approved savings goals.

With universal savings accounts, Congress can tax family savings less, allowing Americans to better prepare for their futures — rain or shine.

Adam N. Michel is a senior policy analyst in The Heritage Foundation's Roe Institute of Economic Policy Studies.