Baby Boomers' Retirement Won't Cause "Market Meltdown"
January 23, 2002
Baby Boomers will be retiring in the near future. There have been increasing concerns over the possibility of a "market meltdown" -- a rapid decline in stock and bond prices as retirees sell financial assets.
According to a recent study by James Poterba of the Massachusetts Institute of Technology, these fears are unfounded, on theoretical and empirical grounds.
- The conclusion that the retirement of the Baby Boomers will cause stock and bond prices to fall assumes that the supply of stocks and bonds will remain fixed.
- It also assumes retirees will quickly sell their assets -- while they actually sell them at a much slower rate so that net financial assets remain flat after age 65.
- The increasing integration of the world's capital markets weakens links between asset returns -- which affect their market value -- and any country-specific demographic shifts.
The weak relationship between the demographic shifts caused by the Baby Boomers and the prices of assets can be corroborated by looking at what happened in the residential real estate market. The individual demand for housing rises significantly as individuals move from age 25 to 40. If the market meltdown prediction where true, we should expect a sharp fall in housing prices since Baby Boomers are past the period of peak demand. But this has not happened.
Instead, Poterba finds per capita demand for financial assets has risen since 1980 and will continue rising until 2020, but will remain flat afterwards.
Source: "Aging Baby Boomers and Financial Markets," Economic Intuition, Summer 2001; based on James M. Poterba, "Demographic Structure and Asset Returns," Review of Economics and Statistics, forthcoming.
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