Can Boomers Cause Capital Markets to Crash?

How Much Damage Can A Rabbit Really Do?

The whole idea behind the market meltdown hypothesis is that a large portion of the population born at the same time can affect the stock market due to their lifecycle choices. By examining what has happened in the past, we can hope to apply our findings to the future.

The 1980s and 1990s saw an increase in stock prices and the stock market in general did quite well. In 1997, a study conducted by Robin Brooks concluded that a “large working-age cohort raises stock and bond prices.”

More recently, in 2000 and 2001, Andrew Abel examined the effect of a baby boom generation on the price of financial assets. The results were that a generation with an irregularly high number of births would “indeed lead to a run-up in asset prices and that there will be a corresponding reduction in prices when an especially large cohort retires.”

Many scholars agree that the baby boomer generation does seem to have an impact on the financial markets. However, whether or not this impact will lead to a sudden meltdown in the stock markets with the retiring of the baby boomers is another matter entirely.

Abel actually concludes that the impact on the stock market and the asset prices does not necessarily indicate an asset meltdown. Abel’s model points towards a decline in stock prices—as believers in the meltdown hypothesis fear—but concludes that the magnitude of the decline would be much too minimal to be termed a ‘meltdown.’

William Shambora’s 2006 study on the effects of a quickly aging population agrees that some of the momentum of the S&P 500 during the last two decades can be attributed to the increased participation of baby boomers saving for retirement. Shambora believes that it is possible that the opposite will happen when the baby boomer cohort begins to retire, causing downward pressure on the stock market by driving stock prices down.

At the very least, “if a large number of boomers leave the workforce …the growth rate of the stock market will be slowed.”

Digesting the Rabbit

Many academics believe that the effects of the baby boomer generation on the stock market in particular have never been conclusively determined.

James Poterba’s 2001 examination of “Demographic Structure and Asset Returns” challenges the market meltdown hypothesis by bringing in bequest motives. Poterba believes that it doesn’t take into consideration the future generations that baby boomers will want to leave a legacy for. He argues that although investors accumulate assets quickly when they are working, once retired, they will “de-cumulate” (sell their assets off) much more slowly.

This contradicts the meltdown hypothesis, as its foundation is the assumption that baby boomers will sell off all their assets quickly once they hit retirement age. Nevertheless, he does concur that the baby boomers played a role in the rising stock prices during the 1980s and 1990s.

Economics Professor Fred Lazar at the Schulich School of Business is sceptical of the market meltdown hypothesis. He believes that for it to have merit there needs to be concrete evidence that the baby boomers have already affected our stock market in the past. Looking at the 1980s and 1990s, which other academics have also examined, Professor Lazar explains that there is no real connection between the prosperity of the stock market of this time and baby boomers investing to save for their retirement.
[pullquote]The whole idea behind the market meltdown hypothesis is that a large portion of the population born at the same time can affect the stock market due to their lifecycle choices.[/pullquote]

The main focus behind Professor Lazar’s disbelief in the market meltdown hypothesis is the personal savings rates of baby boomers during this time. The personal savings rate is the portion of disposable income—income after taxes—that is put towards savings. Throughout the 1980s and 1990s, developed countries worldwide saw declining savings rates. Data regarding the personal savings rates during these periods from the Organization for Economic Cooperation and Development (OECD) support Professor Lazar’s observation.

It is this declining personal savings rate that leads Professor Lazar to conclude that the baby boomers weren’t significantly responsible for raising equity prices. A “personal savings rate that…throughout this period tended not to increase, and over the past 15 years tended to decline” would not have been responsible for an upward pressure in the equity markets during the 1980s and 1990s period, since this was the source of their investments.

Their frugality may have been affected by poor saving strategies or the mentality that because “employers are taking care of me I don’t have to save,” but the connection between that and rising equity prices, according to him, is simply not there.

Canada and the Rabbit

It is important to realize that, although Canada has a large baby boomer generation, their retirement will affect different areas in varying ways. We can expect that if baby boomers are retiring and are looking to sell off assets—not necessarily all, and not necessarily all at one time—there will be some repercussions in certain markets.

Retirees looking to downsize by selling their current houses will be affected differently based on location. Those selling houses in urban locations such as the major Canadian cities of Toronto, Vancouver, Montreal and Calgary will be able to reap the benefits of stable or increasing housing prices, since large immigrant populations coming to these cities continue to place upward pressure on housing prices in general. Anything outside of these areas may see a decline in housing prices to some degree as the demand won’t be enough to meet the potential supply.

This type of location impediment does not apply to the stock market. Retiring baby boomers looking to sell off some stocks will be able to sell to anyone in Canada and the rest of the world, no matter the location. They wouldn’t be encumbered by a specific demand group, and although the developing world may not be able to step up to cover the decreasing demand 100%, they should be able to negate the possibility of a full-blown market meltdown.