ValueWalk’s interview with Timothy Flacke, the CEO of Commonwealth. In this interview, Timothy discusses his and his company’s background, how bad are emergency savings with Americans, causes of the current middle class situation, key findings of the Rise with the Raise research, the SECURE Act, if Social Security’s insolvency a mere myth, and if we need more Government help in retirement planning.
Can you tell us about your background?
I’ve spent 25+ years working at the intersection of low-income people and financial services, with a consistent goal to create broader financial security and enable financial opportunity for all. Before co-founding the nonprofit that’s evolved into Commonwealth, I held a variety of leadership positions in corporate human resources, with responsibility for thousands of hourly workers’ financial welfare. While challenging and interesting, I craved something else, so left that world for a year of service at a rural anti-poverty agency. This work led me to graduate studies in Public Policy at the Harvard Kennedy School, where I became interested in how big shifts in technology, the economy, and social policy trends might create new opportunities for millions of working people to build savings and, ultimately, some wealth. There I met professor Peter Tufano, and the idea for Commonwealth – then Doorways to Dreams Fund, or D2D Fund – was born. Nearly 20 years later, my guiding passion remains the same: how to reduce pervasive financial insecurity in this country, which serves no one – not families, communities, employers, children or our democracy – and over time enable wealth creation for everyone… in a scalable, sustainable way. I’m incredibly fortunate to lead an ingenious, passionate team of doers who every day find ways to pursue this vision through innovative design, unorthodox partnerships and thoughtful research – all aimed at transforming the financial landscape.
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Can you tell us about your firm/organization?
Commonwealth is a nationally recognized, mission-driven organization that strengthens the financial opportunity and security of financially vulnerable people by discovering ideas, piloting solutions and driving innovations to scale.
We work in partnership with consumers, the financial services industry, policy makers, employers, and other mission-driven organizations to build solutions that make people more financially secure. Our work is possible through the support of some of the world’s most respected philanthropies. I sometimes say we have the privilege of harnessing philanthropic capital to unlock market and policy solutions that otherwise would not emerge, all in the service of broader financial security and opportunity.
Our current strategic focus areas include a partnership with BlackRock through their Emergency Savings Initiative with the aim to enable millions of Americans to build financial security through savings. Historically, we have been recognized for our financial security innovations, most significantly in savings. Innovations include prize-linked savings and gamification strategies that increase savings by making it easy and fun, and the leveraging of the federal tax refund as a windfall moment to save. Recently, we completed research on the employer role in helping employees build financial security by leveraging the moment of a raise as another windfall moment to save. These and our other efforts have impacted the federal tax code and spawned new financial products and public policies responsible for helping more than 550,000 Americans build over $2 billion in savings.
A prepaid card savings feature we developed with Walmart and Green Dot Bank, for instance, encouraged shoppers to move more than $2 billion into a “virtual savings vault” in just two years. We also have a robust innovation lab that conducts research, and as a result we have published a large body of work on issues related to financial security and employee financial wellness, employee benefits, emergency savings, wages and tax policy, among other areas.
The FED found that many Americans could not come up with $400 in emergency savings -- how bad is it?
The Federal Reserve’s most recent SHED data makes clear that millions of Americans scramble every day to meet financial challenges, like making rent, medical copays, childcare costs, tuition, or simply replacing a flat tire so they can get to work. This fact is one of the driving forces behind our work, and our own research has pinpointed some of the ways that we can begin to help Americans build savings to reduce financial stress.
Our new research report, Rise with the Raise, underscores the reality of financial insecurity for many Americans – and how it doesn’t just impact individuals, but also employers with lost productivity, lower attendance, and other challenges driven by employee financial stress. Many Americans, especially lower-wage employees, have difficulty managing both savings and debt.
Many workers feel they cannot afford to save, and few are actually doing it. Sixty-five percent of the employees we surveyed nationally said that they were either struggling financially/emotionally or “just getting by.”
The good news is that there are relatively straightforward interventions that employers can implement to improve financial security for their workers. That’s why Commonwealth and our partners are working hard to understand how employers can improve the picture and make savings accessible for millions of financially vulnerable people. Aside from detailing this problem, our Rise with the Raise research also indicated that basic steps from employers--as simple as offering split direct deposit for paychecks--can make a real impact on workers’ ability to save, reducing their stress and in the process enabling them to be better employees.
Healthcare seems to be a big issue -- decent coverage could cost people making $60,000 well over $20000 for a family plan - how can Americans even save when costs are so high?
You’ve zeroed in on a huge and complex problem. The rising cost of healthcare is surely one of America’s most pressing financial challenges, increasingly contributing to financial insecurity and stress among American workers. The average annual healthcare insurance deductible grew 125% from 2006 to 2015. Out-of-pocket health care costs are soaring, and so are the costs of health plans.
High-deductible health plans (HDHPs) – plans with lower premiums and higher deductibles – are one area we’ve been focused on. These plans are attractive because they provide short-term cost savings on premiums to both the employer and employee. But unless they’re well designed, they increase the risk of excessive out-of-pocket health expenses for workers, leading to delayed (or foregone) medical care, missed work, medical debt and loss of workplace productivity. Lower-income employees, who don’t have access to financial resources such as savings and affordable credit, are especially at risk.
Poorly designed HDHPs, especially for employees without savings, can lead to healthcare decisions being made based on one’s finances rather than what’s best for one’s health. To combat this, we have been working with employees on ways to design HDHP benefits that bolster savings and avoid this issue.
What factors do you think have led Americans going from the envied middle class of the world to the current situation?
This is a complex question, with many causes. But it’s worth noting that even with a robust economy, we have not seen wealth accumulated or shared broadly - the trend over recent decades has been the exact opposite. Nearly 80 percent of Americans live paycheck to paycheck. And as you said, research by the Federal Reserve shows that most American families cannot weather a single financial emergency. We know that a modest savings buffer -- even just $400 -- can have a significant positive psychological and financial impact on families. I like to think about the “marginal benefit” of an additional dollar of income or wealth for a given household; through that lens, it’s pretty clear our collective focus should be on getting more dollars into regular working people’s hands, and how to ensure those dollars produce the biggest financial impact.
Where we find hope and promise is employers, financial institutions, fintechs, and other partners attacking these problems in coordination. There’s a growing recognition that financial insecurity is not just an individual problem; we all have a stake in addressing this, and lots of institutions have a role. We see growing recognition of this fact, with a growing appetite by employers, financial institutions, and fintech organizations to address the financial security needs of their employees and customers. We see this in our work with BlackRock, as one example.
In the same spirit, we see a role for public/private partnerships to provide high-quality savings options. Our work with the IRS and tax preparation industry around “split refunds” and tax time US Savings Bonds resulted in hundreds of thousands of working people saving a portion of their refund at tax time; again, straightforward options that are easily accessible often hold incredible power.
We see reasons to aim for more than just basic financial security, too. Innovation in the financial technology industry, coupled with growing awareness of the social, economic, and political costs of wealth inequality, suggest a new opportunity to unlock wealth creation for the one in five American households who have zero or negative net worth.
This is an exciting time to focus on these issues. We can tap an unprecedented array of technology, capital, and talent to end chronic financial insecurity and foster financial opportunity broadly. Doing so will take understanding working families’ financial lives – the focus of much of our research – and a commitment to do better by Americans as a whole, guided by the understanding that we all stand to benefit.
Can you tell us more about your recent report, Rise with the Raise, its key findings?
We embarked upon this research in February 2019 to examine employees’ financial lives and to better position employers to provide the right tools and opportunities for employees to save.
We surveyed more than 1,300 lower-wage employees across the country to understand their financial behaviors and concerns, factors that might influence how they use money received as part of a raise and the opportunity/impact they perceive about financial tools offered by employers. The survey was unique in its approach to wage sub-groups. We surveyed employees who made less than $60,000 and then further analyzed the results in three wage sub-groups built around the estimated living wage for each of nine census regions. The headline for the report is that there are simple savings and other financial security benefits that when implemented by employers not only reduce financial stress for employees, but also bring great value to businesses through improved productivity, increased retention and other positive outcomes. The report highlighted a few key findings:
- Employees are struggling but are well-positioned to receive support from their employers
- Roughly three-quarters of employees said that if their employers offered savings options at the time of a raise, they’d be less stressed and more confident about their finances
- Through high-value, surprisingly straightforward interventions, employers can play a large part in increasing the financial security of their lower-wage employees -- a result that benefits not only the individual, but also provides significant business value.
What do you think of the SECURE Act? It's rare to see legislation with such bipartisan support, why do you think we saw that here?
We’re heartened to see Congress engage on any issue related to household financial security. We hope this may set the stage for Congressional and federal policymaker consideration of additional financial security issues that are particularly critical and acute for lower-income Americans, such as liquid savings.
Is Social Security’s insolvency a mere myth? Can retirees depend on it?
Ultimately the future of Social Security depends on policy choices we make as a country. In my view, no outcome is preordained.
I believe it is unrealistic to think middle class Americans have the ability to save thousands of dollars every year in a 401(k) or individual retirement account - do we need more Government help in retirement planning?
I agree, by and large middle-class Americans are under tremendous financial stress and we won’t achieve financial security - for retirement, or more near term - by simply expecting households to consume less and save more. We need more creative, comprehensive solutions. That means looking for stakeholders beyond the household level who have a stake in improving financial security and can play some constructive role in supporting individuals. You’re right to see government as central to that list - federal, but perhaps also state and local. As noted, we see employers as another example. Over time we may see retailers, technology companies, gig platforms, and social sector organizations, too. Some of these players can help share the costs of financial security; others can produce excellent products and tools, enable convenient distribution, or help shift social norms and values. Complex problems often require “all hands on deck” solutions.
What advice would you give to a young person starting work today who wants to build a large egg nest when they retire? Should they assume SS will be gone?
Great question, but we do not offer individual level financial advice as it’s not our focus.
What’s next for Commonwealth?
We’re excited about several major initiatives, with a goal over the next three years of transforming the financial landscape for 10 million Americans.
We recently partnered with BlackRock in the first phase of their new $50 million commitment to allow millions of people living on low- to moderate-incomes to establish a stronger financial safety net by increasing usage of savings strategies and tools. In that work, as with nearly everything we do, we are looking at savings opportunities that allow people to more easily set some money aside, meeting them where they work, shop, bank or even play.
We’re increasingly focused on initiatives that look beyond financial security to building financial opportunity and what that entails for working Americans - including not only systemic change, but also going “beyond rational” to consider the role of hope and aspiration in long-term financial change.
We are conducting research and considering the role of nontraditional actors like public transit and others in enabling Americans to build savings. We also see promise in a public/private partnership to enable Americans to save for emergencies and other unexpected expenses.