How Widespread Unemployment Might Affect Retirement Security

The National Retirement Risk Index (NRRI) measures the share of working-age households that are at risk of being unable to maintain their pre-retirement standard of living. The NRRI, which is constructed by comparing householdsÕ projected replacement rates Ð retirement income as a percentage of pre-retirement income Ð with target rates, has recently shown about half are at risk. The NRRI was originally constructed using the Federal ReserveÕs 2004 Survey of Consumer Finances (SCF). The SCF is a triennial survey of a nationally representative sample of U.S. householdsÕ assets, liabilities, and demographic characteristics. The NRRI has been updated periodically to reflect data from the 2007, 2010, 2013, and 2016 surveys. We were eagerly awaiting the release of the 2019 SCF this fall to reassess AmericansÕ retirement preparedness. The problem is that the 2019 SCF will reflect a world that no longer exists. Between those interviews and now, the country has been levelled by the COVID-19 pandemic. Hence, the most pressing question at the moment is how retirement security has been affected by the virus and the shutdown of the economy. This crisis will affect retirement security in a very different way than the Great Recession because the destruction is occurring more through widespread unemployment and less through a collapse in the value of financial assets and housing. The discussion proceeds as follows. The first section reviews the nuts and bolts of constructing the NRRI. The second section discusses how we have adapted existing research to estimate the impact of unemployment on earnings and retirement preparedness. The third section reports the results, showing that the pandemic is likely to have increased the NRRI by 5 percentage points Ð with a 7-percentage-point increase for older households and a 3-percentage-point increase for younger ones. The fourth section places the projected increase in context, explaining why the employment effects of this disaster appear to have less of an effect on retirement security than the Great Recession did. Even so, the final section concludes that the pandemic has worsened an already bleak outlook for retirement security.