More Evidence That Spending Spikes Can Derail Retirement Savings

What You Need to Know

New research finds the frequent spending spikes seen in the private sector also occur among public-sector workers.
Particularly worrying is the common occurrence of unfunded spending spikes that can result in higher credit card debt.
One potential solution is the promotion of emergency savings and financial wellness training.

The same pattern of frequent spending spikes seen in the private sector also appears to be a fact of life for public-sector workers and retirees, according to a new analysis published by J.P. Morgan and the Employee Benefit Research Institute.

As defined in the report, a “spending spike” occurs when a household spends 25% more than the previous 12 months’ median spending, wherein the excess spending can’t be met with just that month’s income.

These spending spikes occurred at a similar frequency for public plan participants as for the 401(k) plan participants in the prior study, with some nine in 10 public-sector employee households experiencing them in the study period.

Likewise, a similar level of one in three study participants experienced an “unfunded spending spike,” wherein the 25% jump in spending could not be met with the monthly income plus cash reserves on hand. Once again, lower-income households were found to be more prone to unfunded spending spikes — but higher earners are not immune.

In both the public and private sector, such unfunded spikes often lead to higher credit card debt and retirement plan loans, sometimes with a significant impact on retirement readiness.

A ‘Surprising’ Result

The researchers call the commonality of the findings “surprising,” given the different populations and time periods considered.

“Unlike our earlier study period (2016 – 2020), which was mostly pre-pandemic, our public plan research period (2019 – 2021) overlapped with the pandemic,” the authors observe. “During the pandemic, some households received federal relief checks while they were spending less on travel and entertainment.”

Consequently, credit card debt was reduced, and savings levels climbed for households that received consistent employment income during this time. Even so, the end of government relief seems to have led to the same prior pattern of common spending spikes.

As in the case of the private sector, the researchers conclude, public employers can enhance their employees’ financial security and retirement preparedness through financial wellness programs and supportive policies, such as debt management education and incentivizing or automating emergency savings.

How Public Pensions Factor In

The authors point out that one big difference between the study populations is the fact that defined benefit pensions are not as common in the private sector as they are in the public sectors.

“Most public plan employees have pensions, something most private sector 401(k) participants do not have,” the authors observe. “Nevertheless, and perhaps surprisingly, we found the two studies’ findings were remarkably similar.”

The Frequency of Spikes

Also examined in the new report is the rate of spending spikes in the public-sector population.

On average, spending spikes were greater than the household’s income for three months of the year, among those with at least one spike for the year. For two months per year, on average, spending spikes were greater than their income plus cash reserves — or unfunded.

Broken down by compensation level, some six in 10 participants in public plans earning under $150,000 per year had unfunded spikes totaling more than $2,500 in a year. Within this group itself, eight in 10 experienced spending spikes greater than their income.

“Regardless of income, those with unfunded spending spikes may lack emergency savings,” the researchers warn, “making them vulnerable to a wide range of issues, such as the need for medical care, home and car repairs or other unplanned life events. Some may lack planning for large purchases or have a general overspending issue.”

The Bottom Line

Ultimately, unfunded spending spikes may play havoc with a household’s finances, possibly creating the need to access more funds — whether from credit cards, plan loans or other sources.

“Our research shows that those with higher credit card utilization are more likely to have a spending spike,” the authors note. “In fact, for those taking a plan loan, the median percentage of their credit card limit they used was 67%, compared with 26% for those who did not take a plan loan.”

Those are associations, not causes of spending spikes, but the relationship with credit card use has important implications for long-term financial stability and retirement readiness.