September 8, 2009
Today CBO released a background paper examining whether the demand for assets, such as stocks and bonds, will fall after the retirement of the baby-boomer generationthe segment of the nations population born between 1946 and 1964, whose oldest members turned 62 in 2008. Some economists have warned of the possibility of a dramatic decline in demand as baby boomers sell off their assets to finance their retirement; they assert that the sell-off could cause a dramatic decline in prices. An evaluation of the evidence, however, indicates that such a dramatic decline in asset demand and prices is unlikely.
Demand for Assets
In general, retirees sell assets to finance their retirement, whereas young and middle-aged workers buy assets to save for old age. As a population ages, the share of older, retired people selling assets increases relative to the share of younger, working people buying them. In principle, if an unusually large cohort, such as the baby boomers, were to sell its assets to finance retirement, the total demand for assets in the economy could fall substantially over several decades and the prices of those assets could decline as well.
However, empirical evidence about the behavior of earlier groups of retirees suggests that baby boomers will not sell their assets quickly after they retire. Several factors probably explain that evidence. First, retirees generally are cautious about selling assets to finance consumption because they might need those assets in the future: They might live longer than expected, and medical costs, which are likely to rise as people age, could be higher than anticipated. Second, rather than spend all of their assets, retirees might intentionally retain some to make bequests. Third, wealth in the United States is highly concentrated: One-third of the nations financial assets is held by the wealthiest 1 percent of the U.S. population. The wealthiest people do not spend significant portions of their assets during retirement and in most cases die leaving bequests.
The demand for assets will be reinforced if baby boomers change the timing of their retirement as a result of the recent financial turmoil. Some baby boomers who have lost or spent a significant portion of their assets may defer retirement, shortening the duration of retirement and reducing the amount of assets needing to be sold to finance consumption. The aggregate effect on asset demand might be small, however, if people delayed retiring for only a year or two.
Foreign demand is likely to help sustain the demand for U.S. assets. A rising demand for U.S. financial assets is anticipated to come from developing countries with emerging economies whose populations are younger or aging less quickly than is the U.S. population. By contrast, the demand for assets by new immigrants to the United States is unlikely to have much effect on overall demand.
Prices of Assets
Although the retirement of the baby boomers is not likely to cause a large decline in aggregate demand for assets, several economic studies suggest that the retirement and aging of baby boomers could cause a temporary decrease in asset prices. That prediction of a temporary decrease is based on the studies expectation that the retirement of baby boomers will cause the demand for assets to fall more rapidly than the stock of capital will be reduced, causing asset prices to fall while the capital stock adjusts. Empirical evidence, however, has not revealed much connection between demographic trends and the price changes observed in financial markets.
This paper was prepared by Marika Santoro of CBOs Macroeconomic Analysis Division.