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With the baby boom generation
nearing retirement age and life expectancies continuing to increase, the U.S.
population is aging rapidly. By 2030, the share of the U.S. population that is
over age 65 is projected to be higher than it is in Florida today.
Population aging may affect
financial markets if individuals tend to amass assets during their working years
and spend them during retirement. When there is a large cohort such as the baby
boom, there may be more demand than usual for corporate stock and other assets
while the cohort saves for retirement. This demand may abate after the cohort
retires. Some analysts believe that the rise in stock prices in the 1990s can
be partially attributed to this, and have forecast sharp declines in asset prices
in coming decades as boomers sell their assets to the smaller baby bust generation
that follows them.
In The Impact of Population
Aging on Financial Market, (NBER Working Paper 10851), James Poterba examines
the potential impact of population aging on asset returns, the valuation of
assets, and the demand for various financial assets and products.
The author begins by noting
that several factors may mitigate the expected effect of the baby boom and baby
bust cohorts on asset prices and returns. If boomers anticipate low returns
in the future, they may save less today. If the size of the capital stock can
adjust when the demand for capital increases, the change in asset prices will
be smaller than with a fixed supply of assets. If global capital markets are
well integrated, then asset prices will depend on global demographic forces
rather than trends within a single country. If the age structure in the population
affects the rate of productivity growth, this could swamp any asset price effects
arising from demography-induced changes in asset demand. Finally, if investors
anticipate that the retirement of boomers will lead to lower asset prices, this
future price decline should be incorporated into the current price of assets.
Consequently, asset prices should not experience a sharp decline in the future.
Next, the author turns to
evidence on household asset holdings by age to see whether households accumulate
assets during their working years and decumulate them during retirement. He
cautions that it may be impossible to completely separate the effect of an individual
getting older (age effect) from the effect of being part of a particular cohort
whose preferences may differ from those of other cohorts (cohort effect) and
the effect of having experienced particular events such as a period of high
asset returns at a given point in time (time effect).
He shows that mean and median
asset holdings both rise with age until about age 60. After this, there is no
noticeable decrease in asset values with age, although correcting for the fact
that wealthier households are more likely to survive to older ages results in
some decumulation during retirement. Poterba notes that there will be additional
decumulation of assets in retirement outside of household portfolios, as balances
in defined benefit pension plans are sold to finance benefits.
The author then estimates
the relationship between the age structure of the population and asset prices
and returns using data from the 1926-2003 period. He first examines real annual
returns for three assets - Treasury bills, long-term government bonds, and stocks
in large corporations. He finds that the effect of the age structure on asset
returns is greatest for Treasury Bills, while there is no effect for stocks.
However, the relationship for Treasury Bills exists only prior to World War
II. When he examines the effect of the age structure of the population on the
price of corporate stocks, he finds that an older population is associated with
an increase in stock prices, although the results are very sensitive to the
particular choice of specification.
Finally, the author examines
how population aging may affect the demand for different types of assets by
tabulating age-specific holdings of various assets. This exercise is subject
to the same difficulty in separating age, cohort, and time effects. Poterba
finds that households age 65 and above currently hold about one-third of all
corporate stock held by the household sector, and roughly the same fraction
of bonds. The over-65 group is projected to hold nearly one-half of these assets
in 2040. These older households are also projected to hold nearly two-thirds
of annuity contracts in 2040, up from half today.
In concluding, Poterba notes
that economic theory clearly predicts that a baby boom should drive asset prices
up and asset returns down for its cohort. However, he writes, "none of
the empirical findings provide a strong and convincing measure of the amount
by which asset prices will change as the population of the United States and
other developed nations ages." None-theless, given the inherent difficulties
in estimating this relationship, he believes that "the theoretical models
should be accorded substantial weight in evaluating the potential impact of
demographic shifts."
http://www.nber.org
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