I recently had the opportunity to listen to a number of experts on social security talk about their ideas for the future of the program.  One of the most interesting take-aways was this idea of a sidecar account, or specific short-term savings accounts.  The idea behind these accounts is that we would have the opportunity to put aside pre-tax money into an account that we would have access to for emergencies, house/auto repairs, medical expenses, home purchases, etc.  However, you would only keep about 5k, or other predetermined amount, available in this emergency fund with the rest being deposited directly into your 401k or other retirement plan.

This would function as a sort of emergency fund and ideally eliminate the need from borrowing from your retirement account when unforeseen expenses come up, a phenomenon called leakage.  For instance, one in four people will use some or all of their retirement money for non-retirement needs such as paying a bill, buying a home, dealing with a medical emergency or sending a child to college.  The typical withdrawal is usually not ever fully returned to the account.  According to the Aspen Institute, “For every $1 contributed to retirement accounts by or on behalf of savers under age 55, $0.40 leaks out – and that does not include loans.”

Linking sidecar accounts to retirement accounts would provide favorable tax treatment to the savers, thus encouraging them to save more and increasing the value of their savings and thus financial stability.  Another benefit of the plan is to determine a path that would include automatic enrollment to increase participation.  This might be the trickiest part to realization, as it likely would require a new type of savings program that would overcome legal barriers to automatic enrollment, not to mention the automatic desire to opt out of programs deemed too complicated by consumers.

Although there are still many details to be worked out here, it seems that there is a lot to like about sidecar savings and that they would assist with financial stability and increased retirement savings.