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.