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Will boomer retirement lead to a market selloff?

Posted: Friday, January 03, 2003

NEW YORK (AP) -- Within the next 10 years, the baby boomer generation will start going into retirement. Among experts, opinions differ widely on what the effect that will have on markets and the economy, but no one is painting a happy picture.

''Baby boomers have affected the economy all through their lives. When they went to school they put great strains on the school system; when they entered the work force, wages went up very slowly,'' says John Shoven, professor of economics at Stanford University. ''It would be naive to think that their retirement will go smoothly.''

The baby boomers were born between 1946 and 1964, so the oldest will become 65 years old in 2011, and the youngest ones in 2029.

Pessimists say that since succeeding generations are smaller, retiring boomers who try to sell their stocks and bonds won't find enough buyers, depressing or even crashing the financial markets.

A study by Shoven estimated that after the majority of baby boomers have retired in 2024, U.S. pension plans, which own a huge part of U.S. stock, will have a net outflow for the first time ever. And a simulation by the International Monetary Fund showed that since investors are likely to switch from stocks to bonds as they age, stock prices and bond yields will be substantially lower when the baby boom generation retires.

Paul Hewitt, director of the Global Aging Initiative at the Center for Strategic and International Studies in Washington, sees boomers increasing their savings in the next 10 years, a phenomenon that could be as problematic as a subsequent selloff.

They'll be saving more for retirement, but at the same time, their money will find few good places to go, because the slow-growing global economy will need less investment, Hewitt says.

''If you have rise in savings supply and a decline in investment demand, what do you get? You get a bubble,'' he says.

Shoven, however, doesn't believe there will be a drastic selloff in the financial markets. Instead, companies will find ways of making stocks more attractive to the shrinking number of buyers by increasing dividends and stock buybacks, he says.

''If you own stocks, selling them is not going to be the only way of getting cash out of them,'' Shoven says. ''Dividends are going to come back in style.''

To provide that cash, companies would likely invest less, an appropriate move in a slow-growing economy, Shoven says.

There are other reasons the impact might not be very severe. Sam Stovall, chief investment strategist at Standard & Poor's, sees boomers selling off their holdings gradually.

''Their biggest fear in life is outliving their money, so they're going to do whatever they can to make it last,'' he says. His bet is that they are going to stretch their pensions as far as they go, and try to leave as much as possible of their other holding to their heirs.

But even if there is no massive selloff, the departure of the boomers from the work force will affect the financial markets, since the amount they invest will decline, Stovall says.

The greatest impact on the economy may come not from the baby boom, but from the ''baby bust'' that came after it. Longer lifespans and declining births in the generations after the boom mean that the population is aging, and fewer people of working age will be supporting more retirees.

In 2000, the ratio of Americans between 15 and 59 years old to those over 60 was four to one, according to a United Nations report. In 2050, the ratio will be only two to one.

The aging population will strain the Social Security system, which pays retirees from taxes it levies on workers. Similar retirement systems will face even greater challenges in Europe and Japan, where the baby bust has been much more marked, and immigration is limited.

Deficits in the pension plans may force countries to borrow heavily, raising interest rates around the world, according to the International Monetary Fund.

''You could have a complete meltdown of the global economy because the developed economies don't know how to handle their retirement plans,'' Hewitt said. The Global Aging Initiative he directs tries to educate governments, business leaders and the public about the effects of the aging population.

The retirement of the baby boomers will be only one of many factors affecting markets in the coming years, but just in case it proves a major factor, investors may want to pay attention to a tip that many experts put forward: Invest in countries that have a young population. Newly industrialized and developing countries may see most of the economic growth in this century.

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On the Web:

Global Aging Initiative: www.csis.org/gai

Deutsche Bank study on aging: www.dbresearch.de/PROD/999/PROD0000000000045690.pdf



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