Can Boomers Cause Capital Markets to Crash?

The Rabbit and Capital Mobility

An additional worry that arises from the market meltdown hypothesis is that baby boomers are looking to sell off all their capital, which will drain the capital markets and in turn affect a company’s ability to raise capital for new opportunities such as research, development and expansion. What academics are predicting will happen is a shift in where equity is raised.

Typically, capital is raised in the developed nations—North America, Western Europe, Australia, etc.—and used to fund any R&D or expansion endeavours. What we can expect to occur in the next decade, if capital markets in the developed world are affected by baby boomers retirement dragging down equity markets, is for companies to go elsewhere in the world.

Professor Lazar is quick to point out that we’re living in a world where there really are no real boundaries for cash flow. If a Canadian company can’t find the funds it needs to increase profits in Canada because of a depressed equity market, the lower prices will be enticing for investors in the developing nation, primarily Asia and South America.

Whether or not this shift is so fundamental that companies will begin to relocate their head offices and operations to these countries remains to be seen, but the fact remains: “there’s mobility in getting capital.” As such, a depressed equities market does not necessarily indicate a downturn in economic growth.

The Rabbit and Our Future

So even if the meltdown hypothesis doesn’t come to fruition, what do we need to know about the baby boomer generation and its effects on the rest of the population? The most popular topic is usually the labour market. People who are going to school and have graduated or will be graduating soon are worried about the job opportunities available for them.

Of course, we’ve already had problems in the last couple of years due to the whole sub-prime debacle, but it is possible that we are in for more trouble down the road. This is another issue that Professor Lazar expresses concern over. He is worried that with the level of saving decreasing during the last few decades—as indicated with the personal savings rate—potential retirees simply will not have saved enough.

Professor Lazar believes that to encourage savings during this time the Canadian government had to practically bribe baby boomers—and their employers—to save by providing tax incentives. On top of that, there is likely a large portion of the population who not only did not save for themselves but also did not work for companies that provided large pension contributions, if any at all.

If this is true, this means that Canada—and likely the rest of the developed world with large baby boomer cohorts—will see a population that is aging while also falling below the poverty line. One way potential retirees will avoid this is by not retiring for a few more years. It is possible that the once desirable Freedom 55 will have to become Freedom 75, 85 or even possibly 95 for those who just cannot afford to retire?

With a large population that is older and also still working, younger Canadians looking for positions after finishing school will be hard-pressed to find the supposedly ample opportunities that would open up as baby boomers retired. After all, there is no longer a mandatory retirement age. Professor Lazar stresses that “in terms of workforce, the retirement age is becoming less and less of a factor.”

For those about to begin job hunting during the next few years, we can only begin to hope that the baby boomers actually did save enough for them to retire so that jobs will open up for the next cohort of new employees. This does, however, assuage some of the fears that with a smaller workforce the economy will become stagnant.

Goodbye Rabbit

So should we feel threatened by the looming retirement of this large baby boomer cohort? Even with the disagreements of academics over whether or not the baby boomers pushed up equity prices in the 1980s and 1990s, there is consistency in the belief that we shouldn’t be overly concerned. The general consensus appears to be that any depression in equity prices will be too minimal to be considered a market meltdown, and furthermore would be staunched by a shift in capital lending from the developed to the developing world to increase the demand for financial assets being sold.

For the governments out there seeking policy changes needed to deal with the retirement of baby boomers, the main focus at this point will probably be on healthcare and social security. Of course, this also means that a shift in the country’s allocation of resources will occur to accommodate such an increasingly older population—but to what degree remains to be seen.

ARB Team
Arbitrage Magazine
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