National Retirement Risk Index

The Center for Retirement Research at Boston College is an important resource that draws little public attention. A recent release gives information about their "retirement risk index" which deserves wider attention. Here is their description of their recent research on this subject:

In June 2006, the Center for Retirement Research released the National Retirement Risk Index (NRRI). The results showed that even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes, 43 percent will be at risk of being unable to maintain their standard of living in retirement. Households are more likely to be ‘at risk’ if they are young, have low incomes, or lack pension coverage.

This brief looks at the three major factors that have caused the Index to increase since the early 1980s. These factors are: 1) a decline in Social Security replacement rates due to the decline in one-earner couples and the increase in Social Security’s Normal Retirement Age; 2) lower pension replacement rates as a result of the shift from defined benefit to defined contribution plans; and 3) lower annuity payments due to the dramatic decline in real interest rates. These negative factors have been only partially offset by a modest increase in financial assets, and an increase in the retirement income that homeowners could potentially obtain through reverse mortgages.

Having identified the key movers, this brief also updates the Index from 2004 to 2006. During this period, the run-up in housing prices was cancelled out by a corresponding surge in mortgage debt, which resulted in no change in the ‘at risk’ status of any of the Index’s age cohorts. However, compared to the 2004 Index, the 2006 Index has more Generation Xers and fewer Baby Boomers. Since Generation Xers are more likely to be ‘at risk,’ this change increased the Index slightly to 44 percent.