Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Retiree couple walking on coin staircase

Retirement Planning > Saving for Retirement

Half of U.S. Households at Risk of Retirement Shortfall

Your article was successfully shared with the contacts you provided.

What You Need to Know

  • Even those who plan prudently are at risk, the Center for Retirement Research finds in a revamped survey.
  • The finding has been consistent for years, pointing to systemic problems, researchers suggest.
  • CRR recommends that defined contribution plan coverage be made universal.

Roughly half of the nation’s working-age households are at risk of falling short of much-needed wealth during their retirement years — even if they work to age 65, make good decisions about Social Security and smartly utilize annuities in the planning process.

This is the stark conclusion drawn by the newly revamped National Retirement Risk Index released this week by the Center for Retirement Research at Boston College. The index measures the share of working-age households found to be at risk of being unable to maintain their current standard of living in retirement.

According to the CRR, the updated index offers a range of key insights for retirement industry professionals — many of which are deeply concerning.

Simply put, the index shows America has a serious retirement readiness problem on its hands, one which individuals, employers, policymakers and financial industry practitioners must confront in the years ahead.

What the Data Now Shows

According to the CRR, despite the extensive changes in the methodology underlying the long-running NRRI, the most important findings from previous iterations still hold.

According to the index, about half of working-age households will not be able to maintain their pre-retirement living standard. Moreover, the readiness pattern continues to reflect the health of the economy, raising the possibility that a forthcoming recession could tip even more American households into the at-risk category.

As the CRR notes, the at-risk population increased substantially from 2007 to 2010 during the Great Recession, and then it declined “a bit” from 2013 to 2019 as the economy enjoyed low unemployment, rising wages, strong stock market growth and rising housing prices.

Unfortunately, these improvements were modest due to some countervailing longer-term trends, such as the gradual rise in Social Security’s full retirement age and the continued decline of interest rates — which made it more difficult for households to achieve retirement readiness.

The CRR leadership says this robustness of the results confirms the retirement saving issue faced by today’s working-age households is a deeply entrenched problem, and that the United States desperately needs to fix its retirement system.

The main solution offered by the CRR leadership is that employer defined contribution plan coverage be made universal. Only with continuous coverage will workers be able to accumulate adequate resources to maintain their standard of living in retirement, the CRR warns.

Key Facts About the NRRI 2.0

The updated NRRI is still constructed with data from the Federal Reserve’s Survey of Consumer Finances, a triennial nationally representative household survey.

In basic terms, calculating the NRRI involves three steps. First is projecting a replacement rate, or the anticipated retirement income as a share of pre-retirement income, for each SCF household between the ages of 30 and 59.

Second is the construction of a target replacement rate that would allow each household to maintain its pre-retirement standard of living in retirement, and third is a comparison of the projected and target rates to find the percentage of households “at risk.”

Although the overall modeling framework described above remains unchanged, the updated NRRI now includes what the CRR calls “multiple major improvements.”

For example, the new method projects wealth based on median values, which allows the wealth projections at retirement to better reflect observed distributions, according to the CRR.

Another important adjustment better reflects the broad societal shift from defined benefit pensions to DC plans. As the CRR spells out in its update announcement, the growing share of workers covered by DC plans since the 1980s means that the level and pattern of DC asset accumulation differs dramatically across birth cohorts.

To account for these differences, the new method projects DC assets separately for three broad cohorts. These are workers born before 1945, who were at least halfway into their careers when coverage under DC plans began to expand in 1980; workers born from 1945 to 1955, who were early in their careers during the transition to DC plans; and workers born after 1955, whose careers mostly fall in the years when DC plans were already prevalent.

Other changes include updated and more sophisticated treatment of various sources of debt and a refinement in the target replacement rate model. Additionally, key model assumptions and inputs, such as wage growth, interest rates, inflation and mortality tables, have also been updated.

(Image: Shutterstock)


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.