Association for Public Policy Analysis & Management

Building an adequate stock of contingency savings is often endorsed as a means for low- and moderate-income (LMI) households to overcome volatility in income or expenses, resulting in smoother consumption over time and more stable well-being. With evidence suggesting that volatility in earnings and consumption has increased dramatically in recent decades, it appears more critical than ever for research to examine methods of building emergency savings in in these households. This paper presents results from analysis of data from Refund to Savings (R2S) 2015, one of the largest saving experiments in the United States with over 700,000 participating tax filers, and from the follow-up Household Financial Survey with over 20,000 participants. The experiment tests the idea that tax-time interventions can increase saving behavior even in financially volatile households. Participating households used TurboTax Freedom Edition and met qualifying criteria: adjusted gross household income below $31,000, eligibility for the Earned Income Tax Credit, or active-duty military status with adjusted gross household income below $60,000.

This paper opens with a deep look at the LMI sample’s experience of income and expense volatility. Preliminary analysis reveals that only 43% of survey respondents report that both their income and expenses remain “roughly the same each month.” This finding is somewhat unsurprising because negative income shocks were prevalent: 15% report that someone in the household experienced job loss within the previous 6 months, and 23% report any loss of income over that period. Unexpected expenses are also reported in high numbers, with 15% reporting the need to make substantial home repairs and 32% needing to make substantial car repairs. Over 17% of households report large, unplanned medical expenses.

Preliminary analysis also reveals that financial volatility may represent a barrier to tax-refund saving. Participants who report income or expense volatility are significantly less likely to report an intention to save part of their refund, and those planning to save were expecting to save less on average than financially stable households. Financial volatility is also significantly associated with the experience of material and financial hardships, such as missing rent or bill payments, skipping needed medical care, and overdrawing a bank account.

The paper connects survey data on financial volatility with data from the R2S experiment, which is embedded in the TurboTax software. At the conclusion of the 2015 tax filing season, the research team will test the hypothesis that behaviorally informed saving interventions, specifically the presentation of savings defaults and saving-related priming messages, lead to an increase in the likelihood that refunds will be placed in savings vehicles and that those savings are maintained over the 6 months following refund receipt.

This work provides a rich look at the often turbulent financial lives of LMI households. It tests the use of low-cost, scalable interventions that occur around the tax-filing moment and are designed to increase saving behavior in the face of income and expense volatility; such interventions may offer the possibility of lessening the negative effects of such volatility.