The National Retirement Risk Index: An Update from the 2019 SCF

The National Retirement Risk Index (NRRI) measures the share of American households that are at risk of being unable to maintain their pre-retirement standard of living in retirement. The NRRI compares householdsÕ projected replacement rates Ð retirement income as a percentage of pre-retirement income Ð with target rates that would allow them to maintain their living standard and then calculates the percentage falling short. Since the Great Recession, the NRRI has shown that even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes, roughly half of households are at risk. The NRRI was originally constructed using the Federal ReserveÕs 2004 Survey of Consumer Finances (SCF) and has been updated every three years with the release of this triennial survey. The 2019 SCF offers, once again, an opportunity to take stock of retirement security. The three years from 2016 to 2019 were a period of solid economic growth accompanied by strong stock and housing markets, suggesting that the NRRI may have improved in this span. Of course, since 2019, the world has changed dramatically, so the question is what the NRRI would look like today had the SCF been conducted in 2020. While financial and housing markets have actually seen continued growth in the wake of the COVID-19 pandemic, the crisis created an enormous spike in unemployment Ð particularly among lower paid workers Ð during last spring, from which the labor market is still recovering. Therefore, a full assessment of the NRRI in 2020 requires accounting for all of these factors. As a prelude to the updates, the first section reviews the nuts and bolts of constructing the NRRI. The second section provides a standard update of the NRRI, replacing the 2016 SCF households with those from the 2019 SCF and updating the economic assumptions. The results show that the NRRI did improve, but only slightly, declining from 50 percent of households at risk in 2016 to 49 percent in 2019. The reason for this modest change was that the positive impacts of rising stock and house prices were partially offset by a decline in interest rates and in expected replacement rates from Social Security for lower-income workers who experienced income gains. The third section then estimates what the NRRI would have looked like had the SCF been conducted in the third quarter of 2020, suggesting that the share of households at risk has increased modestly to 51 percent in the wake of the pandemic. The final section concludes that the NRRI confirms what we already know Ð namely that todayÕs workers face a major retirement income challenge.