The National Retirement Risk Index (NRRI) shows that half of today’s working families are at risk of not being able to maintain their standard of living once they retire. This result is not surprising since at any given point about half of private sector workers do not have an employer-sponsored retirement plan, and many who do have a plan end up saving relatively little. The question is how would additional saving affect the NRRI?
The results of the model created by the Center for Retirement Research at Boston College suggest that a 5-percentage-point increase in the contribution rate has only a relatively modest
impact on the NRRI. This finding may seem surprising given that 5 percentage points is a substantial boost in saving—more than a 50% increase in the average contribution rate. To help make sense of this outcome, it is useful to consider three factors:
- First, increased saving has a much larger impact on younger households, because they have many more years to accumulate additional assets before retirement than older households. A 5-percentage-point higher saving rate reduces the NRRI by 11 percentage points for households ages 30-39, compared to only 3 percentage points for those 50-59.
- Second, additional saving has a much larger impact on the “savings gap” than on the NRRI. The gap is the dollar difference between what households with a shortfall have actually saved up to a given year and what they should have saved up to that year in order to maintain their living standards in retirement.
- Third, it is hard to move the NRRI. For example, even the Great Recession resulted in only a 9-percentage-point increase in the Index. The only way to dramatically reduce the percentage of households at risk is to increase the age at which people retire.
Working longer sharply improves the retirement readiness of households. Specifically, the percentage of households at risk would be cut by more than a third if the retirement age in the NRRI went from 65 (the current assumption) to 67 (Social Security’s eventual full retirement age, or FRA). The key to this impact is the structure of Social Security benefits.
The only way to make a dramatic dent in the retirement risk problem is to combine saving more with working two years longer. This option reduces the NRRI by more than half, lowering the percentage of today’s working households at risk to less than 25%. This finding suggests that policymakers, employers, and households could have the biggest impact on meeting the retirement challenge by using more than one tool in their arsenal.
Find the full research brief here.