Some have argued that baby boomers' retirement poses a threat to
working Americans' savings. The value of workers' saved assets,
they say, could drop once retiring boomers stop buying new assets
or sell off current assets in order to have more cash on hand.
Such swings in supply or demand would have to be substantial to
have a real impact on asset values, and the notion that 78 million
baby boomers, who own 50 percent of all financial assets in the
U.S., could create critical mass was a common
refrain of those opposed to Social Security reform in 2005.
However, a new report from the Congressional Budget Office (CBO)
has found that boomers are unlikely to dump assets or create a
demand vacuum that would cause asset values to fall. This finding
is significant because it means that pre-funded retirement savings
in IRAs, 401(k)s, or other personal savings vehicles of today's
workers will not lose value when boomers retire.
Boomers and Supply
One hypothesis about why boomers would negatively impact asset
values is that they would sell off large amounts of assets during
retirement to fund their consumption. Theorists contend that 78
million asset sellers, who became eligible for retirement in 2008,
could cause an asset glut. The CBO analysis reveals that this is
unlikely to occur for the following reasons:
- Boomers continue to save assets, even in retirement.
Retirees face uncertainties about the long-term costs of their
health care and lifespan. To hedge against the risk that they will
require expensive medical treatment or live longer than their
budget, retirees do not rampantly sell assets, as the CBO report
shows. Additionally, survey and research data reported by CBO shows
that roughly one-half to three-quarters of retirees spend little in
order to have a bequest to pass on to heirs (thus drawing down
assets more slowly).
- Boomer wealth is concentrated, so all 78 million retirees
will not be selling assets at once. Only two-thirds of boomers
actually hold assets, and of those, the top 10 percent hold more
than two-thirds of all boomer assets, and the top 1 percent hold
most of the remainder. Evidence collected by CBO shows that
wealthier retirees rely less on their assets for living expenses
during retirement than less wealthy ones. Because of this wealth
concentration, few boomers will be selling their assets, avoiding
an asset-market flood.
Boomers and Demand
The second reason many have suspected that boomers' retirement
would drive asset values down is that, when they are no longer
earning an income, they will stop buying assets and depress demand.
But CBO's analysis diffuses these concerns:
- Reactions to financial turmoil may change behavior.
Like most Americans, many boomers' asset wealth has declined as a
result of the financial market turmoil, and some boomers may delay
retirement as a result. CBO indicates that the likelihood of delay
is mixed. Research studies have revealed that the 2000 recession
had little impact on retirement decisions, but survey data from
2008 indicates that 32 percent of near-retirees (age 55-64) plan to
delay retirement. Two-thirds of boomers do not have adequate
savings to be able to maintain their lifestyles in retirement,
meaning many may likely delay retiring. To better prepare, those who
delay retirement could continue buying (or at least not selling)
assets, minimizing boomers' impact on asset demand.
- International demand will support domestic assets. Any
reduction in asset demand will more than likely be filled by
international buyers. Particularly in China and India, developing
economies are growing rapidly, yet their overall populations are
younger than America's, creating crowds of potential asset buyers.
In fact, demand from China alone could more than make up the
difference in demand lost from boomers.
Boomers Are Not Busters
The sheer number of baby boomers is often considered the driving
force behind many future budgetary dilemmas, such as the
affordability of Social Security and Medicare. However, with the
new CBO study, retiring boomers and working savers can now rest
assured that asset values are insulated from any damage that may be
caused by the coming tidal wave of boomer retirement. This finding
should give savers and policymakers more confidence about the
returns of pre-funded retirement savings accounts.
Moore is Assistant Director of the Thomas A. Roe Institute for
Economic Policy Studies at The Heritage Foundation.