Fewer at Risk for Having Inadequate Income in Retirement

Between 2013 and 2016, the National Retirement Risk Index (NRRI) improved modestly, dropping from 52% to 50% of working-age households, according to the Center for Retirement Research (CRR) at Boston College.

The NRRI is constructed using data from the Federal Reserve’s 2016 Survey of Consumer Finances (SCF)—a triennial survey which collects detailed information about household assets, liabilities, and demographic characteristics.  For SCF households, the NRRI compares projected replacement rates—retirement income as a percentage of pre-retirement income—with target rates that would allow households to maintain their living standard and calculates the percentage at risk of falling short.

Households whose projected replacement rates fall more than 10% below the target are deemed to be at risk of having insufficient income to maintain their pre-retirement standard of living.  The NRRI is the percentage of all households that fall more than 10% short of their target.

The CRR has previously defended its NRRI as a better measure of retirement readiness than others. A Congressional Budget Office report notes current measures of the adequacy of retirement income provide diverse answers about the state of retirement income security in the United States, stemming from a number of sources—which definition of adequacy is used, which cohorts are analyzed and precisely how income and wealth are counted.

Factors that impacted the 2016 NRRI

The CRR says between 2013 and 2016, both equity and house prices increased sharply, serving to reduce the NRRI. In its Issue Brief, it explains that despite a short pullback from late 2015 to early 2016, equity prices increased by more than 20% after adjusting for inflation between the third quarter of 2013 (which marks the previous NRRI baseline) and the third quarter of 2016.  However, the CRR notes, these gains have been concentrated in the top third of the income distribution, which holds about 87% of all equities—meaning much of the gains went to households that were already not at risk.

In contrast to equities, a substantial percentage of households in all income groups own a home and enjoyed the benefits of rising prices.  Between 2013 and 2016, U.S. home prices increased about 14% in real terms, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, the CRR notes. In the NRRI, home ownership and home prices have a significant impact because households are assumed to access their home equity at retirement by taking out a reverse mortgage. The higher the home value, the more households can extract in cash and turn into an income stream through annuitization.

However, according to the CRR, there were three main factors increasing the share of households at risk for inadequate income in retirement—the rise in Social Security’s Full Retirement Age (FRA), the decline in interest rates, and new reverse mortgage rules that lowered the percentage of home equity that could be accessed at any given interest rate. The researchers explain that compared to prior years, by 2016, almost all workers had an FRA of 67. Because benefits are actuarially reduced for early claiming, an increase in the FRA causes benefits claimed at 65—the assumed retirement age in the NRRI—to decline. The Issue Brief notes that this decline affects all households but has a particularly large impact on low-income households, which depend almost entirely on Social Security for retirement income.

In addition, lower interest rates results in households getting less income from annuitizing their assets. In 2017, the government announced tougher rules for the Home Equity Conversion Mortgage (HECM) program—raising up-front premiums and placing tighter limits on loans. This effect increased the percentage of households at risk, but its impact was slightly offset by the decline in interest rates, which raised the amount of home equity that can be borrowed.

Middle-age and middle income fared worse than others

According to the Issue Brief, when viewed by age and income, all groups of households experienced an improvement in NRRI, except middle-age and middle-income households. One reason for the lack of improvement for the middle-age group is more non-mortgage borrowing, particularly for education expenses. For example, for households ages 45 to 50, their average non-mortgage debt-to-income ratio almost doubled from 14% in 2013 to 27% in 2016. 

Increased borrowing was also an issue for the middle-income group, aggravated by a downturn in reported defined benefit coverage.

“This analysis clearly confirms that many of today’s workers need to save more and/or work longer to achieve a secure retirement,” the researchers conclude.