Boomer Retirement: Will Market Fall as Assets Are Sold Off?

Article excerpt

BOSTON -- Many wise men have predicted the stock and bond markets will go into a free fall for decades once baby boomers start withdrawing money from their retirement accounts, but a new report last week by the Congressional Budget Office suggests that won't happen when boomers retire.

"Some economists have warned of the possibility of a dramatic decline in demand as baby boomers sell off their assets to finance their retirement; they assert that the sell-off could cause a dramatic decline in prices," Douglas Elmendorf, director of the CBO, wrote in his report.

"An evaluation of the evidence, however, indicates that such a dramatic decline in asset demand and prices is unlikely," he said.

If only that were true. But some people disagree with at least some of the CBO's findings.

"The CBO report provides some ideas, but has a long way to go before resolving the question" of whether demand for and prices of assets will fall as boomers retire, said Alan Gustman, a professor at Dartmouth University, and Thomas Steinmeier, a professor at Texas Tech University.

For its part, the CBO said it makes sense in principle that if more people are selling assets to finance their retirement than are buying assets, then stock and bond prices would decline. But the empirical evidence, the CBO said, doesn't bear that out. Earlier groups of retirees didn't sell their holdings en masse to the fund their retirement.

Several factors probably explain the evidence, Elmendorf said in the report. "First, retirees generally are cautious about selling assets to finance consumption because they might need those assets in the future: They might live longer than expected, and medical costs, which are likely to rise as people age, could be higher than anticipated. Second, rather than spend all of their assets, retirees might intentionally retain some to make bequests.

"Third, wealth in the United States is highly concentrated: One- third of the nation's financial assets is held by the wealthiest 1 percent of the U.S. population. The wealthiest people do not spend significant portions of their assets during retirement and in most cases, die leaving bequests."

What's more, the report said demand for assets will remain high as baby boomers push back the timing of their retirement because of the recent market turmoil. "Some baby boomers who have lost or spent a significant portion of their assets may defer retirement, shortening the duration of retirement and reducing the amount of assets needing to be sold to finance consumption," the report said.

Will prices fall -- or won't they?

The CBO said it's unlikely stock and bond prices will fall as boomers retire. "Empirical evidence has not revealed much connection between demographic trends and the price changes observed in financial markets."

Some economists agree with at least some of the CBO's findings.

"Couples in particular do not decumulate (spend down their assets) until late in life, so the immediate effect of boomers retiring will be small," said Michael Hurd of the Rand Corp. …