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Think of a number: your income as you approach retirement. Now think of another number: your post-retirement income. How big is the gap?

For many American workers, the answer will be “too big.” According to the National Retirement Risk Index, launched on June 6 by the Center for Retirement Research (CRR) at Boston College, 43 percent of all working-age households in the United States risk being unable to keep up their preretirement living standard once they retire. The prospects are most grim for the youngest households studied (those headed by workers now age 34–41), for people in the bottom third of the income distribution (with median earnings of $18,000), and for those with no pension of any kind (just under half of all private-sector workers).

In a fast-changing retirement landscape characterized by lengthening life spans, a rising Social Security Normal Retirement Age, dwindling traditional pensions, in­adequate 401(k) balances, and abysmal savings rates, the index is designed to take stock at regular intervals of Americans’ preparedness for retirement in light of the likely harsher environment that will greet them when the day comes. “It’s hard to get people to see that problems are coming when they look around and see today’s retirees doing fine,” said CRR Director Alicia Munnell in an interview. As a strong proponent of social insurance, and as an economist who has helped shape the national debate on retirement security for over two decades, in books from The Future of Social Security (1977) to Coming Up Short: The Challenge of 401(k) Plans (with Annika Sundén, 2004), Munnell sees an urgent need to focus Americans’ attention on the issues that undermine their preparedness for retirement.

“Nobody—individuals, government, business—can take action until they acknowledge that there’s a problem. The whole point of the index is to say, look, there’s a problem,” said Munnell, who is the Peter F. Drucker Professor in Management Sciences at the Carroll School of Management. The 30-page report is the fruit of a year’s intensive data analysis by Munnell and coauthors CRR Research Economist Anthony Webb and Research Associate Luke Delorme ’04, underwritten by the Nationwide Mutual Insurance Company.

Based in part on information from the Federal Reserve Board’s 2004 Survey of Consumer Finances, a study of 4,500 households, the index predicts the fortunes of three cohorts of workers: Early Boomers (born 1946–54), Late Boomers (born 1955–64), and Generation Xers (born 1965–72). Each age group is further divided into three income levels, the top third with median annual earnings of $100,000, the middle with $51,000, and the bottom with $18,000.

For each group, the index calculates how much income households can expect in retirement, relative to their preretirement income. This “replacement rate” is then compared to a target rate that would enable a household to maintain its pre­retirement standard of living. Target incomes for all types of households are lower than income at retirement, owing to lower post-retirement rates of taxation and because retirees no longer need make Social Security contributions or otherwise accumulate retirement savings. However, the definition of an adequate level of replacement varies according to the nature of the household. Low-income households need the highest replacement rate, 81 percent. For those in the top income tier, the rate is 67 percent. The target replacement rate for American households overall is 73 percent of preretirement income.

Households that fall more than 10 percent short of their target rate are considered to be “at risk,” and the consequences of being “at risk” worsen as income levels decline. “For the lower third, being at risk really means that you may not be able to afford all the necessities of life,” said Munnell. For the middle third, it may mean “feeling strapped and worried about money all the time,” and even those in the upper third will feel pinched.

The index’s overall figure of 43 percent of households at risk conceals some important differences among the groups. For instance, it seems clear that people retiring in the near future have been all along on a more positive financial trajectory than those who will retire 30 or, in most cases, even 15 years from now. Economists have suggested this for years, said Munnell, because of certain historical advantages enjoyed by the Early Boomers that are not likely to endure or recur (including a relatively low Normal Retirement Age for Social Security of 66; more employee benefit plans with annuities linked to years of service and salary; relatively high yields on investments; and relatively low costs for medical care). But even in the oldest and most prosperous subgroup, those Early Boomers in the top income bracket, one-third are estimated to be at risk of at least a “difficult adjustment,” come retirement. Among the youngest and poorest of the groups studied, the Generation Xers in the bottom income tier, an estimated 60 percent will encounter real hardship.

If this picture seems bleak enough, the reality may be worse, said Munnell. The index is based on assumptions that reflect an optimistic scenario in which Americans retire at 65, take full advantage of their assets by purchasing inflation-indexed annuities, and tap their housing equity by means of reverse mortgages. In reality, most Americans retire before 65, and fail to annuitize their assets. When the study’s assumptions are keyed more closely to actual behavior, the share of overall households falling into the “at risk” category climbs dramatically—to 66 percent of all Americans entering retirement over the next 30 or so years.

Munnell, who served on the President’s Council of Economic Advisors under Clinton, said that she and her coauthors chose to build their main case on the more upbeat figures because they were concerned that the index might otherwise be viewed as a “‘Chicken Little, sky is falling’ type of publication.” “If you make the problem too horrendous, people will shy away from it altogether,” she said. Her goal is to alert people to the steps they can take now to substantially improve their retirement security. For the cohort of younger workers, for instance, the index shows that saving an additional 3 percent from each paycheck will lower the number of young households at risk by 11 percentage points, from 49 percent to 38 percent. If all workers were to push retirement back from age 65 to 67, the benefit would be similar, a drop from 43 percent at risk to 32 percent. Noting that almost 60 percent of people retire at the age of 62, the earliest that Social Security benefits are available, Munnell said: “Some people have horrible jobs, and they’re exhausted, and they need the money. But a lot of people do it just because the money’s there. And that means they’re taking actuarially reduced benefits that may look fine at 62, but they’re not looking ahead to how dependent they’re going to be on those benefits in their seventies and eighties.”

As a first attempt at constructing a comprehensive, nationally representative measure of retirement preparedness, said Munnell, the strength of the index is not that it uncovers “a whole lot of new things, but that it summarizes in an easily accessible form what we know.” The Wall Street Journal covered the index extensively on its launch day, and in the week that followed, the CRR staff was scheduling back-to-back interviews with journalists from news outlets ranging from CNN to USA Today.

The index will be updated at six-month intervals. This will help keep retirement issues in the spotlight, Munnell said, and will allow researchers and the public to track Americans’ progress—or slippage—on the course toward security in old age.

Jane Whitehead is a writer based in the Boston area. The complete “Retirements at Risk: A New National Retirement Index” can be read at www.bc.edu/crr/nrri.shtml.

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