Friday, September 11, 2009

CBO: Baby Boom Stock Decline Unlikely

The Congressional Budget Office released a new paper titled "Will the Demand for Assets Fall When the Baby Boomers Retire?" which looks at how the retirement of the large Baby Boom generation will affect prices of stocks and bonds. CBO summarizes the paper:

Some economists have warned of the possibility of a dramatic decline in demand as baby boomers sell off their assets to finance consumption in retirement; they assert that the sell-off could cause a dramatic decline in prices. An evaluation of the evidence, however, indicates that such a dramatic decline in asset demand and prices is unlikely.

Why not?

First, 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. 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: 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.

The whole paper is worth a read. The GAO came to similar conclusions in their own paper on the subject.

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