Households ‘At Risk’: A Closer Look at the Bottom Third

Alicia Munnell, Steven A. Sass (), Pamela Perun and Anthony Webb
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Pamela Perun: Initiative on Financial Security

Issues in Brief from Center for Retirement Research

Abstract: The Center’s National Retirement Risk Index (NRRI) provides a measure of the percentage of households that will be unable to maintain their standard of living in retirement. Issued in June 2006 with numbers based on the 2004 Federal Reserve’s Survey of Consumer Finances, the Index shows that 43 percent of the population will be ‘at risk.’ ‘At risk’ means different things, however, for households in different parts of the income distribution. For those in the top third, ‘at risk’ may require cutting back on some of the normal amenities enjoyed before retirement, but for those in the bottom third ‘at risk’ may mean foregoing essentials. This brief takes a closer look at the NRRI for the bottom third of the population. The brief focuses on three issues. The first is the relative change in the NRRI for the bottom third as opposed to the upper two-thirds over the period 1983-2004. Although the percent ‘at risk’ remains consistently higher for the bottom third, the situation for those at the low end of the income scale deteriorated less over the period than it did for the top two-thirds of households. The reason is that two of the main drivers — the shift from defined benefit to defined contribution plans and the decline in real interest rates — were less relevant for those at the low end of the income scale. The second issue pertains to the outlook for the bottom third going forward. Because the bottom third of households relies almost entirely on Social Security in retirement, the continued increase in the Normal Retirement Age (NRA) will raise the percentage ‘at risk.’ The final section explores the implication of the increase in the percentage of households in the bottom third ‘at risk’ for poverty among the elderly in the future.

Keywords: national retirement risk index; bottom third; at risk; defined benefit; defined contribution; interest rates; retirement age (search for similar items in EconPapers)
Date: 2007-01, Revised 2007-01
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