AMERICANS WILL SOON NEED EXTRA MONEY
July 27, 2020 - Douglas Myser
Americans will soon need extra money. During the worst economic collapse in generations, U.S. households actually managed to put aside more money. It may not be enough to get them through the aftermath though. Savings rates soared to an unprecedented one third of disposable income during the pandemic lockdown. Still unemployed Americans found there weren't many places to spend their paychecks, and expanded government benefits helped paper over the financial cracks for the tens of millions who lost their jobs. But the fiscal lifeline is a temporary one. When it's withdrawn--and Congress is already discussing the timetable--fragile household finances may come under growing strain. Some 37% of adults told the Federal Reserve last year they didn't have enough cash to handle an unexpected expense of $400. That's down from about 50% in 2013, as households bolstered their savings during the long U.S. expansion. Americans will soon need extra money.
Still, it raises a question: If almost 2 in 5 Americans can't handle a surprise car repair bill, how will they cope in a drawn out downturn ? Hardly any economist expects the U.S. to return to 2019 levels of employment in the foreseeable future. The jobless rate, which fell as low as 3.5% last year, soared into the double digits by April. It's not just the poor who are vulnerable, data suggest. Even well off middle class families may struggle to come up with the cash to endure an economic drought of more than a couple months--because they tend to hold savings in assets that are difficult and costly to access in an emergency. "A lot of the actual wealth people have is tied into forms of assets that are not very liquid," said Princeton University Economics professor Gianluca Violante. "It's very hard to monetize in the short run." Americans will soon need extra money.
Because of that many will fall back on nest eggs that are illiquid. tax breaks for mortgage interest and matching employer contributions to retirement accounts means its "smart and convenient" to save that way. It just leaves households exposed to sudden shocks like unemployment. Many may need Tax Resolution Services.
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