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Friday, April 28, 2006

Retiring Baby Boomers and Stock Prices

Wharton finance professor Jeremy Siegel says the retirement age will need to be increased to age 74 if we shut ourselves off from the rest of the world, but only need rise to age 68 if we fully embed in the global economy. This is his answer to the question "Will stock and bond markets collapse as retiring baby boomers start liquidating assets?":

A Boomer Bust?, BusinessWeek Online: My interest in population and stock prices was piqued 8 to 10 years ago. An expert named Harry Dent used to say that everything about stock movements can be explained by population. I thought that sounded crazy. But as I gave speeches around the country, that was the most asked question I got. What happens when boomers retire and sell their assets? Are there enough people to absorb all that wealth?

I believe that over the next 50 years, the aging population is the most critical issue facing developed world. Life expectancy vs. retirement were 1.6 years apart in 1950, when they were 69 vs. 67. Today, that gap is 14.5 years. This trend can't continue.

The age wave is the most severe in Japan. By mid century, 75 to 80 will be most populous age group there, and the number of workers per retiree will fall to one-to-one. The big questions facing the developed world are, who's going produce the goods, and who's going buy the assets. If there are not enough workers earning income, then there aren't enough buyers of all the stocks and bonds that are going be sold. ...

I built a model to show how much longer Americans will have to work because of the coming shortage of workers. Life expectancy will continue to rise. But the retirement age will rise substantially more, I believe, from 62 today to 73 or 74 in the future. Of course, some say it will rise just because people live longer. But it has to rise more than that. The age Americans spend in retirement will shrink from 14.4 years today to 9.2 by mid century.

What can fix this problem? Productivity is one possibility. But even if productivity grows at 3.5% a year, it only buys a couple more years. What about immigration? How many people will the U.S. need to keep the retirement age at 62? About half a billion, according to my calculation. This is a lot of people.

Some people say I'm a pessimist. Well, I am if we just have to rely only on ourselves ... and Europe, because we have a lot of assets that have to be sold. I find that there will be a fall of 40% to 50% if we just rely on ourselves. But then there is the rest of the world, which is much younger. ...

How does that help us, that the rest of the developing world is so young? Because the old sell to the young. It used to be in the family, and the clan, then in the state. Florida is the oldest state, but it has no aging problem, because they can sell into the U.S. market, where there are younger people who buy their assets and ship them goods. We'll be at a higher average age in 50 years, but we'll live in a younger world. We can sell our assets to the rest of the world, and they can ship us goods...

If we rely just on ourselves, people will have to work 12 years longer. But if we embed in global economy, we can sell assets to the developing world, and they can ship us goods. That is our best hope, and if we do that our retirement age will stabilize at 68.

This is the global solution. I'm writing a small book called that. If we just rely on ourselves, our capital markets can't absorb all our assets. However if we let the world work, then I'm more optimistic. Our markets will be healthy, which will ameliorate our situation. So I'm pessimistic only if we shut out the rest of the world. If we don't, I'm an optimist with respect to the markets.

    Posted by on Friday, April 28, 2006 at 03:01 PM in Economics | Permalink  TrackBack (0)  Comments (24)

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