This week's edition of the The Economist magazine has an article on the coming doom in asset markets as the baby boom retires and tries to dump all of its accumulated wealth to finance old-age consumption. The article is a mainly devoted to a paper presented by MIT economist James Poterba at a conference sponsored by the Federal Reserve Bank of Kansas City last week in Jackson Hole, WY.
The article is not available online, unless you have a subscription, but Poterba's paper is available if you want to slog through it. If you don't, here are some highlights from the Economist article. (Note the heartwarming use of the life-cycle theory of consumption and saving behavior.)
The significance of this change is that people tend to save most, and to accumulate financial assets, during middle age. According to the standard “life-cycle” theory, people vary their saving rate over their lives in order to smooth consumption. When young, people borrow, to spend more than they earn; in middle age, they repay their debts and build up a nest egg for retirement; when old, they sell assets to finance their retirement. This suggests that changes in the age structure of the population will affect total saving in the economy and thus asset prices.
Not encouraging, perhaps, and Poterba does find a " positive correlation between the level of share prices and the share of the population aged between 40 and 64." On the other hand:
So will share prices fall in future as the baby-boomers age? One flaw in this theory, Mr Poterba points out, is that detailed savings data suggest that, while older people stop accumulating further net wealth, they do not run down their assets as fast as the life-cycle theory implies... As a result, there may be no sudden rush to sell assets when baby-boomers retire.
Another reason for thinking that any fall in share prices will be more modest than crude models suggest is that it is common knowledge that the baby-boomers are nearing retirement, so market prices today should already be taking account of future demographic developments. Share prices should therefore adjust relatively smoothly over time, thereby avoiding a meltdown. A third moderating effect is that ... savers can invest abroad in foreign assets, [so] the link between an ageing population and domestic share prices will be muted.
Feel better?