Will the baby boomers' retirement cause the stock market to go bust?
That question, studied and debated for more than a decade, is no longer hypothetical. Kathleen Casey-Kirschling, the formerteacher who was born one second after midnight on January 1, 1946, became eligible for this New Year's day, making her the first splash of a demographic tsunami. Over the next three decades, nearly 80 million boomers will join her.
To some prognosticators, the prospect of this swollen generation stepping down is a fright -- many times worse than the stock market's tumble last week. If the baby boomers stop working, they ask, who will produce the goods and services to keep the economy growing? If they stop earning, who will pay taxes to fund theirchecks? And if they sell off stocks and bonds to finance their golden years, who will buy?
The answers to those questions remain covered in fog. Only this is absolutely clear: The generation that was first raised by Dr. Spock, first mesmerized by television and first serenaded by the Beatles is about to redefine retirement, just as it has every other stage of American life.
Threat to Stocks
At the core of concerns about the baby boomers' retirement is something economists call the "life-cycle hypothesis" of economic behavior: Most people tend to save little when young, build up savings during middle age, and then spend those savings in retirement.
That leads some savvy analysts to fret that the boomers' retirement will be marked by widespread selling of stocks and bonds. Jeremy Siegel, a professor at the University of Pennsylvania's Wharton School, has said his computer model shows that, absent help from overseas investors -- buying he does expect to cushion the blow -- the boomers' retirement could cause stock prices to fall 40% to 50%.
"We have never witnessed anything like this," Dr. Siegel says of the huge exodus from the work force and its potential market effects.
But don't short the stock market just yet. There are reasons to think the future won't be so dire.
To begin with, a boomer-drivenis unlikely to begin in the next decade or so. Many boomers are just reaching their peak earning years, and, for a while at least, their increased savings will offset any securities sales by others like Ms. Casey-Kirschling who opt for early retirement.
Moreover, while the baby boomers' rapid ramping up of savings helped fuel the soaring stock market of the '80s and '90s, the data suggests the "dissaving" after retirement happens much more slowly -- less a hill than a gently sloping plateau.
Assist From Abroad
Then there's the fact that the U.S. is, increasingly, an integrated part of a global economy. Even if boomers want to sell, Dr. Siegel argues, there will be plenty of younger and newly wealthy people in, and other emergent countries who will be ready to buy all the securities that the boomers want to dump.
"We can sell our assets to the rest of the world," Dr. Siegel says, "and they can ship us their goods." To some extent, of course, that's already happening.
Complicating the picture is the problem of how to pay for the government benefits that boomers are entitled to in retirement. Thethat spending, absent changes, will grow from about 4% to 6% of the U.S. economy in the next 25 years, while Medicare and Medicaid will grow from 4% to 8%. By 2050, programs for the elderly are likely to eat up as big a share of the economy as the entire government does today -- forcing working Americans to face a possible 50% increase in their taxes.
David Walker, the U.S. comptroller general, thinks failure to come to grips with that fundamental fiscal problem could hold the seeds of the U.S.'s demise. "The Roman Republic fell for many reasons," he has said, "but three reasons are worth remembering: declining moral and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government."
Still, while demography may be destiny, that destiny is not unalterable. There are several economic developments that could lessen the burden of the boomers' sunset years.
One is more rapid growth in productivity. Once the boomers retire, the U.S. will have only two workers for every one person in retirement -- compared with four today. But if those workers are more productive than their predecessors -- perhaps because of better technology -- they can earn enough to finance the boomers' retirement and maintain the nation's wealth. The prospects for technology and productivity rescuing the day, however, have dimmed in the past year, as the government's measures of productivity growth have slowed.
Another possibility is immigration. The U.S. can allow in more, younger workers from overseas. While that may be economically attractive, however, it's politically deadly -- as candidates are learning in this year's presidential campaign.
Finally, there is the possibility that baby boomers learn that work doesn't end at 62 or 65 or 66, but rather at 70, 75 or even 80. Whenwas created, the average American had no reason to expect to live to the age of 65. Today, thanks to improvements in health care, he or she has every reason to expect to live to 75 or 80 or beyond. If so, shouldn't we remain productive members of the work force for longer?
If the answer to that question is yes, it would go a long way toward ensuring that grim economic and market forecasts for the baby boomers' final years never come to pass.