The Market Braces for the Boomers
Sunday, January 6, 2008provided by
Will the baby boomers' retirement cause the stock market to go bust?
That question, studied and debated for more than a decade, is no longer hypothetical. Kathleen Casey-Kirschling, the former New Jersey teacher who was born one second after midnight on January 1, 1946, became eligible for Social Security benefitsthis New Year's day, making her the first splash of a demographictsunami. Over the next three decades, nearly 80 million boomers willjoin her.
To some prognosticators, the prospect of this swollengeneration stepping down is a fright -- many times worse than the stockmarket's tumble last week. If the baby boomers stop working, they ask,who will produce the goods and services to keep the economy growing? Ifthey stop earning, who will pay taxes to fund their Social Security and Medicare checks? And if they sell off stocks and bonds to finance their golden years, who will buy?
| More from The Wall Street Journal Online: • How to Share Less With Uncle Sam • Grandma Needs Money. Now What? • Money to Grandma? The Readers Vent |
The answers to those questions remaincovered in fog. Only this is absolutely clear: The generation that wasfirst raised by Dr. Spock, first mesmerized by television and firstserenaded by the Beatles is about to redefine retirement, just as ithas every other stage of American life.
Threat to Stocks
Atthe core of concerns about the baby boomers' retirement is somethingeconomists call the "life-cycle hypothesis" of economic behavior: Mostpeople tend to save little when young, build up savings during middleage, and then spend those savings in retirement.
That leads somesavvy analysts to fret that the boomers' retirement will be marked bywidespread selling of stocks and bonds. Jeremy Siegel, a professor atthe University of Pennsylvania's Wharton School, has said his computermodel shows that, absent help from overseas investors -- buying he doesexpect to cushion the blow -- the boomers' retirement could cause stockprices to fall 40% to 50%.
"We have never witnessed anything likethis," Dr. Siegel says of the huge exodus from the work force and itspotential market effects.
But don't short the stock market just yet. There are reasons to think the future won't be so dire.
To begin with, a boomer-driven sell-offis unlikely to begin in the next decade or so. Many boomers are justreaching their peak earning years, and, for a while at least, theirincreased savings will offset any securities sales by others like Ms.Casey-Kirschling who opt for early retirement.
Moreover, whilethe baby boomers' rapid ramping up of savings helped fuel the soaringstock market of the '80s and '90s, the data suggests the "dissaving"after retirement happens much more slowly -- less a hill than a gentlysloping plateau.
Assist From Abroad
Thenthere's the fact that the U.S. is, increasingly, an integrated part ofa global economy. Even if boomers want to sell, Dr. Siegel argues,there will be plenty of younger and newly wealthy people in China, India and other emergent countries who will be ready to buy all the securities that the boomers want to dump.
"Wecan sell our assets to the rest of the world," Dr. Siegel says, "andthey can ship us their goods." To some extent, of course, that'salready happening.
Complicatingthe picture is the problem of how to pay for the government benefitsthat boomers are entitled to in retirement. The Congressional Budget Office projects that Social Securityspending, absent changes, will grow from about 4% to 6% of the U.S.economy in the next 25 years, while Medicare and Medicaid will growfrom 4% to 8%. By 2050, programs for the elderly are likely to eat upas big a share of the economy as the entire government does today --forcing working Americans to face a possible 50% increase in theirtaxes.
David Walker, the U.S. comptroller general, thinks failureto come to grips with that fundamental fiscal problem could hold theseeds of the U.S.'s demise. "The Roman Republic fell for many reasons,"he has said, "but three reasons are worth remembering: declining moraland political civility at home, an overconfident and overextendedmilitary in foreign lands, and fiscal irresponsibility by the centralgovernment."
Still, while demography may be destiny, that destinyis not unalterable. There are several economic developments that couldlessen the burden of the boomers' sunset years.
One is more rapidgrowth in productivity. Once the boomers retire, the U.S. will haveonly two workers for every one person in retirement -- compared withfour today. But if those workers are more productive than theirpredecessors -- perhaps because of better technology -- they can earnenough to finance the boomers' retirement and maintain the nation'swealth. The prospects for technology and productivity rescuing the day,however, have dimmed in the past year, as the government's measures ofproductivity growth have slowed.
Importing Workers
Anotherpossibility is immigration. The U.S. can allow in more, younger workersfrom overseas. While that may be economically attractive, however, it'spolitically deadly -- as candidates are learning in this year'spresidential campaign.
Finally, there is the possibility thatbaby boomers learn that work doesn't end at 62 or 65 or 66, but ratherat 70, 75 or even 80. When Social Securitywas created, the average American had no reason to expect to live tothe age of 65. Today, thanks to improvements in health care, he or shehas every reason to expect to live to 75 or 80 or beyond. If so,shouldn't we remain productive members of the work force for longer?
Ifthe answer to that question is yes, it would go a long way towardensuring that grim economic and market forecasts for the baby boomers'final years never come to pass.
