Wednesday, November 17, 2004

Impact of Baby boomers from Porterba

I was just sent this paper. It is by James Porterba. Given the recent post on the Geanakoplos, Magill, and Quinzii paper that concluded stock prices may be negatively impacted when baby boomers retire, I think this may give some further perspective to the issue.

Short version: Porterba concludes that not all assets will fall when the boomers retire and that past population booms have been met with only modest price changes.

In Porterba's words:
"The paper begins by discussing the theoretical basis for a link between population age structure and asset prices. Standard models suggest that equilibrium returns on financial assets will vary in response to changes in population age structure. While the direction of the effect of demographic changes is not controversial, the quantitative importance of such changes for financial markets is open to debate. The paper presents several strands of empirical evidence that bear on this issue.

First, it describes current age-specific patterns of asset holding in the United States, with the goal of understanding the age-wealth trajectory and how it may affect the future demand for financial assets....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. 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."

That said, I would still not plan on having as high of returns in the future as we have had over the past 20 years and maintain my view that those of us behind the boom generation should save more and plan on realizing lower returns and try to diversify into regions whose population is not aging as quickly as US and Europe.

But that said, the news is better than some fear. Very interesting paper and only time will tell!

The paper is available through SSRN and from Porterba's own site.

For the record, the person who sent it to me, found it on a site that I absolutely love and have linked to it since its inception.

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