What is the Age of Reason?

The National Retirement Risk Index measures the share of American households who are ‘at risk’ of being unable to maintain their pre-retirement stan­dard of living in retirement. The Index results from comparing households’ projected replacement rates – retirement income as a percent of pre-retirement income – with target rates that would allow them to maintain their living standard. 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, in 2004 43 percent would have been ‘at risk’ of being unable to maintain their standard of living in retirement. The NRRI was originally constructed using the Federal Reserve’s 2004 Survey of Consumer Finances (SCF). The SCF is a triennial survey of a nationally representative sample of U.S. households, which collects detailed information on households’ as­sets, liabilities, and demographic characteristics. The release of the Federal Reserve’s 2007 Survey of Consumer Finances seemed like a great opportunity to re-assess Americans’ retirement preparedness. The problem is that the 2007 SCF reflects a world that no longer exists. Interviews were conducted between May and December, a period during which the Dow Jones reached 14,000 and housing prices were only slightly off their peak. Between the time of the interviews and the second quarter of 2009, direct equity holdings of households declined by $7 trillion and housing values dropped by $3 trillion. Thus, two updates are required – one to show what the NRRI looked like in 2007 and one to show what it looks like in mid-2009. As prelude to the updates, Section I describes the changing retirement landscape and Section II reviews the nuts and bolts of constructing the NRRI. Section III updates the NRRI using the 2007 SCF, showing little change in the percent of households ‘at risk.’ Section IV then proj­ects what the NRRI would have looked like had the Survey of Consumer Finances been conducted in the second quarter of 2009, revealing that the share of households ‘at risk’ has increased to 51 percent in the wake of the financial crisis. Section V concludes that the NRRI confirms what we already know – namely that today’s workers face a major retirement income challenge.