In the game of musical chairs, when the music stops, players scramble for a seat, and someone gets bumped out in every round. There has been speculation that boomers will play a game of “reverse” financial-musical chairs by bailing out of non-guaranteed assets. In this case, the last investor holding the assets loses.

A recent report from the Congressional Budget Office (CBO), “Will the Demand for Assets Fall When the Baby Boomers Retire?” addresses this issue. It’s interesting research; here are the highlights.

Some economists warn that if the baby boom generation begins to sell off assets to finance retirement, there could be a steep decline in the demand for assets, particularly stocks. The amount of saving by the baby boomers during their working years might already have affected asset markets.

Some economists conclude that the increase in baby boomers’ demand for assets during their high-saving years explains some of the strength of the stock market over the past two decades.

That demand for assets also could have contributed to the increase in the real (inflation-adjusted) price of housing in the 1970s and 1980s, although the sharp rise and fall in house prices during the past decade does not appear to be closely linked to demographic factors.

In principle, if such an unusually large cohort were to sell its accumulated assets to finance consumption during retirement, the total demand for assets in the economy could fall substantially over several decades and the prices of those assets could decline as well.

However, empirical evidence about the behavior of earlier groups of retirees suggests that baby boomers will not sell their accumulated assets quickly after they retire.

Several factors probably explain that evidence:

- Retirees generally are cautious about selling assets to finance consumption, thinking that they might need those assets as they face uncertainty: They might live longer than expected and medical costs, which are likely to rise as people age, could be higher than anticipated.

- Rather than spend all of their assets, retirees might intentionally retain some to make bequests.

- Wealth in the United States is highly concentrated: About 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 down significant portions of their assets to finance consumption during retirement; in most cases, they die leaving bequests.

Some baby boomers who have lost or spent a significant portion of their retirement assets during the financial turmoil of the past two years might decide to defer retirement, although the empirical evidence is mixed. Such delays could shorten the duration of retirement for those people, reducing the amount of assets they would need to sell off to finance consumption during retirement. The aggregate effect on asset demand might be small, however, if people delayed retiring for only a year or two.

Asset demand also could be affected if retiring baby boomers sell risky assets, such as corporate stocks, in order to shift their portfolios toward safer assets. According to the evidence, however, once they retire, most people do not substantially change the composition of their asset portfolios.

Foreign demand is likely to help sustain the demand for U.S. assets even though some baby boomers might sell some of their assets to finance consumption during retirement. Such an increase in foreign demand is expected to be driven by a rising demand from investors in developing nations with emerging economies and relatively young populations. By contrast, the demand for assets by new immigrants to the United States is unlikely to have much effect on overall demand.

Although the retirement of the baby boomers is not likely to cause a large decline in aggregate demand for assets, several economic studies suggest that the retirement and aging of baby boomers could cause a temporary decrease in asset prices. That prediction of a temporary decrease is based on the studies’ theoretical prediction that the retirement of baby boomers will cause the demand for assets to fall more rapidly than the installed stock of capital will be reduced, causing asset prices to fall while the capital stock adjusts.

Empirical evidence, however, has not revealed much connection between demographic trends and the changes observed in financial markets.

The CBO’s full report is available online.