Roughly half of the nation’s working-age households will not be able to maintain their standard of living when they retire.
That’s according to the latest findings from a newly retooled version of the National Retirement Risk Index, which captures the share of working-age households that could fall short in retirement—even if they work to age 65 and annuitize all their assets.
The Center for Retirement Research at Boston College announced the findings in a new issue brief, “The National Retirement Risk Index: Version 2.0,” by Yimeng Yin, Anqi Chen, and Alicia Munnell.
“Only with continuous coverage will workers be able to accumulate adequate resources to maintain their standard of living in retirement.”
The upgraded version of the index more accurately compares households’ projected replacement rates—retirement income as a percentage of pre-retirement income—with target rates that would allow them to maintain their living standard. While the findings may be more accurate, they are still in line with earlier findings—that roughly half (47% in the new report compared to 50% in the 2010 study) will not be able to maintain their standard of living in retirement. The results have been stable over time, with some ups and downs reflecting economic and market fluctuations.
“The robustness of the results confirms the retirement saving issue faced by today’s working-age households, and that we need to fix our retirement system so that employer plan coverage is universal,” the brief’s authors write in their conclusion. “Only with continuous coverage will workers be able to accumulate adequate resources to maintain their standard of living in retirement.”
Many provisions in SECURE 2.0 are of course intended to decrease the retirement plan coverage gap, and proposed legislation seeks to address the issue with a controversial government solution.
Among the issue brief’s findings:
• The index continues to reflect the health of the economy. It increased substantially from 2007 to 2010 during the Great Recession, and then declined a bit from 2013 to 2019 as the economy enjoyed low unemployment, rising wages, strong stock market growth, and rising housing prices. The issue brief note that these improvements were modest due to some countervailing longer-term trends—such as the gradual rise in Social Security’s Full Retirement Age (FRA) and the continued decline of interest rates—which made it more difficult for households to achieve retirement readiness.
• Households’ retirement preparedness in all income groups was heavily affected by the Great Recession. The middle and the highest thirds saw significant improvement from 2010-2019 due to rebounding housing and equity prices. In contrast, households in the bottom third saw virtually no improvement as they are less likely to own a house and participate in DC plans, and have few financial assets.
• The increase in the Social Security full retirement age has a particularly large impact on low-income households, who depend almost entirely on Social Security for retirement income.
Retooling the Index
Since its inception, the Center has periodically made modest changes to the NRRI. Recently, the Center undertook a major overhaul to incorporate new research findings and methodological advances.
The biggest change to the NRRI is modifying the projection of wealth-to-income ratios for each household to more accurately reflect the wealth distributions observed in the data. The old method tended to overestimate the wealth of middle- and lower-income households while the new method projects wealth based on median values, which makes the wealth projections at retirement better reflect the observed distributions.
Among several other improvements, the new NRRI better reflects the shift from DB to DC plans; now models financial debt separately; refining of the target replacement rate model; and incorporates the Earned Income Tax Credit in replacement rates.
SEE ALSO:
• 7 Demographic Disparities Impacting Retirement Readiness
• New Tool from Milliman Like a ‘Credit Score for Retirement Readiness’