boomers' retirement could threaten Wall Street
The impact of
the baby-boomer generation's aging and retirement is already raising
concerns when it comes to health-care costs, employment and social security.
Add another reason to worry about the aging boomers: their impact on the
stock market. According to research at the Olin School of Business at
Washington University in St. Louis, retirees don't invest as much as younger
workers, which could mean a blow to Wall Street when boomers pull out of the
"When you have
a voluntary retirement age, as we do in the United States, people tend to
invest more from an
age," says Hong Liu, associate professor of finance at the Olin School of
Business. "People are willing to take on more risk when they are younger,
when they know that if their investments don't pan out, they can always work
to make up for it."
When the baby boomers do it, the whole country will feel the effect
retirement, the option of hedging against a financial market downturn by
working is no longer an attractive option, Liu says. This explains why most
people shift their assets to less-dicey investments at the time they retire.
That strategy is logical, Liu says. However, when millions of baby boomers
follow that pattern in a concentrated period of time, the impact on the
stock market could be formidable. Fewer people investing in the market means
the market will weaken. It's a problem the U.S. should be aware of, but
which European markets probably won't see.
with mandatory retirement, we don't expect people to shift out of their
stock investments when they stop working," Liu says. "This is because they
know exactly when they will retire and thus shift their portfolio long
however, have spent much of their investing years hedging against their date
of retirement. They also have the comfort of knowing that a reliable
insurance policy will help buoy them should tragedy strike. Yet when
retirement comes, Liu says, Americans find they don't have much savings to
fall back on. It may sound counter-intuitive, but the low savings rate could
be seen as a sign of a successful insurance industry.
"We find that
in countries with a well-established insurance industry, people are willing
to invest and consume more but save less because of the safety net of their
insurance," Liu says. "China exemplifies what happens without a
well-developed insurance industry: stock market participation is low,
consumption is low and savings are high. All because the Chinese know that
they need to save for the bad days."