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Get Ready For the Geezer Asset Meltdown
by Ed Zwirn
I wrote recently in this investment blog about the growing concern among economists that increasing pessimism on the part of Baby Boomers threatens to put a brake on growth and, in fact may be one of the reasons why recessions seem to be lasting longer these days.
This much is clear: Overall pessimism (translate: bearishness) is rising most quickly among Boomers in the 50 to 64 year-old cohort. This age bias, as pointed out, transcends every other factor, even income/wealth levels.
But while this may sort itself out as the U.S. economy continues (however slowly) to pull out of its most recent downturn, there are longer-term fears that our aging population may prompt a long bear market. As people get old, the argument goes, they stop earning new money and begin selling off their assets in order to fund their retirements.
We are probably already seeing this tendency toward disinvestment at work if we look at the housing market, which has proven to be the weakest point in the recovery. Consumer spending is also lagging, despite the pickup in the labor market, a fact which has prompted most economists to sharply downsize their heretofore optimistic projections for 2014 GDP growth.
But will this tendency reach a tipping point as more and more geezers start spending their retirement savings and cause a stock market meltdown?
MIT's James Poterba took up this question in a working paper he prepared nearly 10 years ago for the National Bureau of Economic Research and found the evidence supporting the "asset market meltdown" hypothesis to be ambiguous at best.
Describing the age-specific pattern of asset holding in the U.S., Poterba confirms the common wisdom that these holdings rise sharply when households are in their 30s and 40s, and drop tend to drop off sharply as people age and sell off. After all, you can't take it with you. But as for a meltdown?
"Aside from the automatic decline in the value of defined benefit pension assets as households age, however, other financial assets decline only gradually during retirement," he writes. "When these data are used to project asset demands in light of the future age structure of the U.S. population, they do not show a sharp decline in asset demand between 2020 and 2050."
By 2030, Porteba points out, the fraction of the U.S. population over the age of 65 will be greater than the current fraction for Florida. Between 2000 and 2030, the U.S. Census Bureau estimates that the fraction of the U.S. population over the age of 65 will grow from 17% to 27% of the population over the age of 20. One obvious challenge posed by this trend is the impact it will have on the government's fiscal balances.
But, whether it occurs in a rapid meltdown or in a more gradual fashion, the aging of the U.S., along with most of the developed world, will undoubtedly have at least a long-term deleterious impact upon the stock market.
Populations can of course grow older for and one (or all) of three reasons: The birth rate can decline, old people can live longer, or the number of young immigrants can decline. According to Porteba, who cites reams of census data, the aging of the populace in the U.S. is due to the first two factors: The birth rate in the U.S. has fallen from 3.03 in 1950 to slightly more than 2.0 as of 2004. At the same time, life expectancy for men and women who are currently 65 has risen sharply.
As conservative commentators are wont to point out, this may mean some hard choices ahead. If people live long enough to outlive their retirement savings, there will be fewer young people paying into the system in support of retirees, meaning either that payroll taxes will have to be raised or benefits reduced, or both.
But while birth rates and mortality rates are statistically easy to predict, the third of these variables, immigration, is a source of uncertainty. "If the U.S. were to substantially expand the number of immigrants who were allowed to enter the country over the next few decades, the rate of population aging would be lower than the data suggest," the paper states. "Because the average age of immigrants is lower than the average age in the existing population."
Fast forward 10 years from this research, we are witness to the spectacle of an unprecedented number of children crossing the border in a desperate attempt to flee violence and poverty and come to the U.S. and (eventually) work and pay taxes and buy things. Instead of allowing them to do so, politicians are working the public into a frenzy over this sad spectacle, and spending tax money to detain them and send them back where they came from. The argument for what those in favor of it call immigration reform is justly being made on humanitarian grounds, but, as the data suggest, there may be cold economic reasons in favor of opening the gates. On the other hand, buying into this logic may require leadership that thinks decades ahead, as opposed to jockeying for position at the next election.
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