Unfunded Spending Spikes Affect Public, Private Employees Alike

An average of nine out of every 10 public sector employee households experience spending spikes above their income, and nearly one-third of those households cannot fund these unexpected spending needs with income and cash reserves, according to new research.

Without a financial cushion, these workers were more likely to have increased credit-card debt or have taken a defined-contribution-plan loan, such as from a 403(b) or 457 plan. Higher credit-card balances are associated with lower retirement plan contributions, ultimately affecting public employees’ retirement readiness.

A new study from J.P. Morgan Asset Management, the Employee Benefit Research Institute, the Public Retirement Research Lab and the National Association of Government Defined Contribution Administrators showed that public sector employees with public sector retirement plans experience spending spikes at the same rate as private sector employees. The research defined spending spikes as monthly spending that is at least 25% above the previous 12 months’ median spending that cannot be covered by income. An unfunded spending spike is one that cannot be covered by income and cash reserves that month. The study is based on responses from more than 3,700 public employees.

The data build on the organizations’ joint research from 2023 that found spending spikes hurt 401(k) participants in the private sector. In both studies, nearly one-third of households’ spikes were unfunded.
That public and private sector employees with retirement plans had similar financial precarities surprised the researchers, says Sharon Carson, executive director and retirement strategist at J.P. Morgan Asset Management.

“We thought that we might find something a little bit different, because [public employees] have pensions and maybe that gave them a little more opportunity to have … emergency savings, but it seems like they have the same issues as the rest of us,” Carson says.

The study showed 45% of public employees making from $20,000 through $30,000 were likely to have unfunded spending spikes totaling more than $2,500 in a year, but almost 25% of study participants earning more than $100,000 annually also had unfunded spikes.

The study’s data identify a need for people to have an emergency savings fund to cover unexpected expenses. However, a key difference for public sector employees from private sector workers is the SECURE 2.0 Act of 2022 does not include an emergency savings provision for public sector defined contribution plans. The emergency savings provision in SECURE 2.0 only provides for $1,000 of penalty-free hardship withdrawals for public plan employees, the report stated.

Carson says it was likely an oversight by Congress to not include public employees in the emergency savings provision of SECURE 2.0. Amending the legislation to allow public sector plan sponsors to include an emergency savings provision would be “good public policy,” she says.

Even without an in-plan emergency fund provision, Carson says public sector employers can encourage their workers to create outside emergency funds, such as by offering to split direct deposit payments into separate accounts or offering small incentives to encourage workers to start saving. Targeted education and communication about debt management and budgeting provided to workers who are taking plan loans may help as well.

Conventional wisdom is to save three to six months of expenses in an emergency account, but Carson acknowledges that figure can be overwhelming. Chase Bank data show rainy-day savings may not need to be that large, and balances could be closer to two to three months of after-tax income.

“It’s just important to get people started, and then it can build from there,” Carson says.