WITHDRAWN: Job Loss and Financial Distress during COVID-19: The Protective Role of Liquid Assets

Background and Purpose: The COVID-19 pandemic spawned an unprecedented macroeconomic crisis comprised of simultaneous demand, supply, and financial shocks that greatly affected US households as unemployment peaked at nearly 15% in April 2020. Over half (57%) of U.S. households affected by COVID-19 related job loss and not receiving unemployment benefits said they were "just getting by" or "finding it difficult to get by" (Board of Governors of the Federal Reserve System, 2020). Liquid assets can help households avoid financial distress during income dips, especially among households waiting for or ineligible to receive unemployment assistance. The purpose of our study was to examine the degree to which liquid assets mitigated financial distress amidst job and income losses during the early days of the COVID-19 pandemic. Findings from our study can guide public policies to help financially gird households against major events like COVID-19.

Methods: Data for this study came from the Socio-Economic Impacts of COVID-19 Survey fielded from April 27, 2020, to May 12, 2020 using a nationally representative sample of 4,765 respondents. Financial distress was measured with eight indicators in two categories: difficulty meeting financial obligations (e.g., skipping bills) and using high-cost financial resources (e.g., payday loans). Liquid assets were measured by a quartile distribution of amounts in cash, checking, and savings accounts held just prior to the pandemic. An array of demographic and financial characteristics were used as covariates. To correct for endogeneity, we used generalized boosted regression modeling (GBM) to estimate propensity scores to balance the groups who did and did not experience a COVID-19 related job/income loss. Robustness checks included using different specifications of liquid assets, accounting for receipt of CARES Act Economic Impact Payments and/or unemployment assistance, and adjusting for pre-pandemic financial distress.

Results: Households experiencing COVID-19 job or income losses were more likely to experience all eight indicators of financial distress while households with liquid assets in the upper 75% of the distribution (roughly $2,000 and above) had significantly lowered risk for all eight distress indicators compared to the lower 25%. Liquid assets significantly moderated the relationship between the most financial distress indicators and COVID-19-related job or income loss, though this effect was found only for those in the top two quartiles of liquid assets (roughly $8,000 and above), with less of a protective effect for carrying credit card debt and over-drafting bank accounts.

Conclusion and Implications: Our results show that the protective effects of liquid assets translate to the specific context of the COVID-19 pandemic and the accompanying economic turmoil, while prior research demonstrated this protective effect in the context of relatively normal or stable economic conditions. Our findings suggest that policies to enable households to build and retain liquid assets may lower their risk for financial distress in the event of a major event with resulting wide-scale job and income losses. These policies might include expanded access to free bank accounts, enabling employers to offer emergency savings accounts alongside defined contribution plans, and encouraging employers to offer split direct deposit and savings matches.