ETF and iShares® Investment News & Articles

Twilight of Boomers Won't Roil Markets

September 2, 2004; Page A2

A financial nightmare surfaces occasionally in the press and at academic conferences: The stock and bond markets will soar as the big baby-boom generation saves for retirement and then collapse in "an asset-market meltdown" when the baby boomers cash in their 401(k)s to pay for retirement.

It has some plausibility. It is hard to imagine the best-off boomers, those who have actually saved for retirement, eating peanut-butter and jelly sandwiches to preserve their portfolios. And it is easy to chart the stock market over the past 50 years against the fraction of the population between the ages of 40 and 64 and see (at least until the past few years) a close correlation. Stock prices did rise as more of those born between 1946 and 1964 hit their 40th birthdays. So won't they plummet when the boomers turn 65?

Relax.

There is good reason to worry about the approaching retirement of the baby boomers, the first of whom turn 62 and thus eligible for Social Security benefits in 2008. About 12.5% of Americans are over 65 today; by 2030, 20% will be. (Indeed, it would be comforting if the presidential candidates talked more about this, and less about what they were doing 30 years ago during the Vietnam War.) This change threatens the stability of Social Security and, even more, the Medicare health-insurance program, and their counterparts in other aging societies. It will force big changes in the workplace and health-care system. It will, by creating a thirst for young workers, alter the political and economic dynamics of immigration in the U.S., Western Europe and Japan. But a stock and bond-market bust isn't likely.

" The underlying parable has a certain validity," says James Poterba, a Massachusetts Institute of Technology economist who dissected the nightmare scenario at last week's Federal Reserve Bank of Kansas City retreat at Jackson Hole, Wyo. "Demographic changes should matter for asset prices. When there are lots of people who are demanding assets, that should have an effect on asset prices."

But, you can't blame the baby boom for everything, he argues. The demographic effect isn't big enough to trigger a collapse in stock and bond markets. Demography isn't always destiny.

Mr. Poterba makes a three-part attack on what he calls "the alarmist notion that somehow in 2025 the stock market is going to fall 25% because the baby boomers are retired."

The first caution is statistical. "There is no evidence that the real returns on corporate stocks for the last 75 years have been correlated with population age structure," he says. He does find a link between demographics and the level of the stock market (which, if you're into the details, he measures by looking at the ratio of stock prices to dividends), but basically he doesn't trust the statistics. A long bull market did coincide with the middle-aging of the baby boom, he says, but that doesn't mean one caused the other.

The second caution is that the over-65 set isn't behaving in accord with naïve predictions; old folks don't liquidate their portfolios and spend as much as was predicted.

Federal Reserve Chairman Alan Greenspan, still working at age 78, noted the same thing at Jackson Hole. "The elderly in the United States, contrary to conventional wisdom, seem to have drawn down their accumulated wealth only modestly," he said. Retirees are spending less and saving more than anticipated by economists who have argued "that savings are built up during the working years to meet retirement needs." Perhaps retirees have seen friends who lived well into their 90s, and are holding on to their savings. Perhaps they're saving (wisely) to pay end-of-life health-care bills. Perhaps they want to leave a chunk of their savings to their children, rather than spending so much of it on vacations and fine wine.

The third caution is that there is a lot more than demography at play in the global economy. There is a comforting certainty to demography: If you know the number of 50-year-olds today, it's easy to estimate the number of 55-year-olds there will be in five years.

But things much harder to predict probably will have a much bigger impact: Terrorism, war and peace, for example. Or the evolution of globalization. Or the capacity of technology and reorganization of modern economies to quicken the pace of productivity growth, and create a bigger pie for workers and retirees to share two or three decades from now.

We would be well-served to worry more about those things.