Preliminaries: This is a continuation of a series of posts answering questions from the SSIRLive! Webinar on the Hidden Financial Lives of America’s Poor and Middle Class. You can see the first post in the series here and the second here. The responses here are my opinions on these questions — Jonathan Morduch and Rachel Schneider may have different ones.
Do you think daily access to income as opposed to bi-weekly or monthly access will have a material positive impact on individuals daily lives or financial habits, etc.?
The timing of paydays certainly matters to households in a number of ways. As we saw in the diaries, often households were having to make decisions based not on whether they had enough money, but whether they had enough money that day or week.
There are a couple of organizations working on providing workers with more frequent access to pay such as Active Hours and SimpleFi. Because of the way workers are paid, these are essentially loans from an employer to employees. But as the folks involved in these organizations will argue, the employee has already earned the money by performing the work, so the employee is in effect making a loan to the employer in the first place.
There is a separate question here that I’m very interested in, but have struggled to find much information on: How did we end up with bi-weekly or semi-monthly pay as the standard? It’s worth noting that Torah law required workers to be paid at the end of the work day, explicitly to prevent landowners from exploiting daily laborers. If anyone knows of any work on the evolution of payday, please let me know.
Now, let’s take a step back to consider whether access to daily pay would be a good thing. While it would certainly make many households more liquid, it’s not clear how much benefit that would provide over the medium- and long-term. There’s a lot of evidence to suggest that workers who are paid daily tend to set targets for hours worked and earnings based on short-term needs. If we look at developing countries, where daily pay is much more common, we obviously don’t see that workers are much better off. In Kenya, Pascaline Dupas and Jonathan Robinson find that bicycle taxi drivers have a short-term horizon for cash needs that dictates how many hours they work. Kaur, Kremer and Mullainathan found that Indian call center workers willingly choose a contract that commits them to working harder over piece rates. Greg Clark argues that a big part of productivity gains in the Industrial Revolution was the work rules that factories imposed on workers, including both hours worked each day and weekly pay.
That being said, I think it’s productive not just to think about the match-up of the timing of work to the timing of pay, but the timing of pay to the timing of expenses. It’s notable that while many bills and expenses are predictable and regular they do not match up easily with paydays. Where there are options to vary payment frequency to better align with paydays, for instance bi-weekly mortgage payments, those options usually come with a fee. Or they are offered by firms like payday lenders, pawn shops and rent-to-own merchants which are much more expensive (in total) than alternatives.
It’s understandable why many service providers didn’t want to handle more frequent payments when processing them was a highly manual (and therefore expensive) task. But with current technology the reasons for not offering more payment flexibility are unclear. I doubt organizations have actually compared the cost of receiving payments twice a month, aligned with payday, versus the cost of following up on late payments or collecting on delinquent accounts. I think there is a lot of opportunity for innovation in this area.
What are some of the researched or best practice ways to encourage Americans to save more and liquidate savings less frequently? Is it tech-driven? Behavioral Psychology?
To begin answering this question, we need to start with basic definitions and assumptions. First, there is no solid definition of “savings.” How long does money have to be set aside before it becomes savings? In the US Financial Diaries, we saw households saving a great deal for needs within the year. But those pressing needs prevented them from building up longer-term savings. It’s not clear to me that the best path forward is to encourage people who are already setting aside 10 to 20 percent of their income in a month to pay for needs within 30 or 60 days that they need to “save” more.
Second, there is a question of when households should liquidate the savings they do have. We have very little evidence on what “good” decisions are for a family who has, for instance, managed to save some money in an IRA but then faces a job loss. Is it better for them to build up credit card debt and not liquidate their retirement savings? The recent SaveUSA experiment, which encouraged people to save at least part of their tax refund, found that even people who managed to build up savings didn’t experience less financial hardship. One reason could be that once people manage to build up some savings they resist liquidating them, even when they should, because building up savings is so hard. In many contexts we see plenty of examples of people “borrowing to save,” whether that is via a traditional loan, or via something like a savings group/ROSCA.
In terms of helping people to save, clearly commitments and reminders can help. There’s some evidence that prize-linked savings can boost savings. I find the evidence on matched-savings programs to be disappointing.
Where do these diary families keep their short-term, cash-flow smoothing funds? Under the mattress? In the bank? Are they conscientious of putting aside these funds in high income months?
Detailed answers to these questions can be found in our Savings Horizons and Emergency Savings briefs (and in this video or this infographic). In short form, the households are saving a lot more for short-term needs than they are able to build up over time. So in that sense, they are conscientious about putting some money aside. We see that roughly 50 percent of expense spikes seem to be paid for by drawing down short-term savings. Households use a variety of strategies to set money aside. Many have bank savings accounts. But saving by keeping cash set aside or by giving cash to a family member to hold isn’t unusual. Stay tuned for more analysis on spending spikes and how households finance them.
We had several questions about Even, which was mentioned during the second webinar:
· “Income-smoothing programs are promising, but one that was mentioned carried with it a weekly fee. How much is this fee going to be? Will it be expressed as a dollar amount or a percentage of the transaction?”
· “What happens to people who don’t have a spike before a dip?”
· “Do people using Even have to have bank accounts? What about people who don’t have access to smartphones? Are there services for them?”
I asked Jane Leibrock from Even to respond to directly. Here’s what Jane has to say:
“Even is free for the first 30 days; after that it makes money from a $3 weekly subscription charge, which is automatically withdrawn from the Even member’s bank account every Friday. The subscription is the only way Even makes money. Even prefers to make money from a subscription because it incentivizes the company to retain satisfied customers, compared to a revenue strategy reliant on charging interest or fees, which might incentivize the company to keep customers in debt.
If an Even member signs up and experiences a dip in income in the form of a lower-than-average paycheck before they get a higher-than-average check, Even boosts their low check using its own cash reserves. Technically, this boost is an advance on the member’s own future earnings, since it will be repaid out of the next higher-than-average-check they receive.
Currently Even is only available for people who have bank accounts (and use them to receive direct deposit paychecks) and who use smartphones. Active Hours, a service that advances its users money from future paychecks based on hours already worked, also requires use of a smartphone app. Brick-and-mortar payday lending services don’t require having either a bank account or a smartphone, though they charge high interest rates. For now, Even is working on getting its product right while serving a well-defined market; in the future, it’s interested in expanding once it’s ready to do a good job of serving a more diverse user base.”
Would a guaranteed minimum income be a good answer? What impact would it have on work incentives?
The short answer is that we don’t know — because basic minimum incomes haven’t really been tried. But there is good reason to experiment with them based on the evidence we do have:
1) Conditional Cash Transfer programs, which provide cash support to families conditional on behaviors like getting children vaccinated, keeping kids in school, etc. have been very successful in many parts of the world.
2) Unconditional Cash Transfer programs, which drop the conditions of CCTs, seem to do well at lower cost. Importantly there is little evidence that cash is “wasted” — recipients do not seem to spend the money they receive on “wine, women and song,” (yes, this includes men who receive cash, not just women).
3) Boosting incomes of the poor through cash and/or asset transfers seems to have long-term positive effects in the places it has been tried and rigorously evaluated. Importantly, there is little evidence that receiving transfers lowers propensity to work.
I do think we need to keep in mind that there are benefits from work. Kathy Edin’s research on the Earned Income Tax Credit illustrates that recipients of the EITC feel differently, and better, about the money they receive through that program — which is tied to working — than they do about other aid. Participating in the labor force seems to have important mental health benefits (at least when the job is not exploitative). While there are plenty of problems with TANF, the welfare reform of the 1990s that built in work requirements, solid research indicates that recipients don’t mind work requirements and actually want to work, not just receive benefits. So my personal feeling is that any effort to basic income needs to take into account pathways to paid labor.
The good news is there are several basic income trials that seem to be about to get under way. We will hopefully learn a lot about what basic income can and cannot do over the next decade.