The Facts May Not Coincide With Fears Of a Baby-Boom Collapse

BOSTON – For years now, pundits have been yelling "mayday, mayday, mayday" not about a current disaster, but about a forthcoming disaster. They are signaling their distress over what will happen to the stock market when some 77 million baby boomers retire over the next few decades.

According to the pessimists, retiring boomers will sell their assets in such a way to cause a sharp and sudden decline in the stock and bond markets that turns into a prolonged and insidious bear market not unlike that of the late 1920s and 1930s — complete with soup lines and apple- and pencil-selling vagabonds on every street corner.

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These predictions, however, would be wrong, according to a recent Government Accountability Office report. Boomers, says the GAO, will not sell their assets in such a way to cause any major, or minor for that matter, decline in stock and bond prices.

The reasons are many and in some cases point to other and different problems that must be addressed. For one, boomers don't have any assets to sell, the GAO reports. And of the small minority of boomers that do own assets, it's unlikely that they will need to sell those stocks and bonds to fund their retirement. The top 5 percent of boomers control 52 percent of the financial assets held by their generation.

What's more, the GAO notes that if present is prelude, the predictions of the pessimists will be way off base: Current retirees, for instance, presently spend down their money slowly and, in some cases, actually still manage to sock some money away. If boomers behave the same way, a rapid and large sell-off of financial assets appears unlikely, the GAO report states.

And the GAO says there are other factors that reduce the odds of a bear market. Those include the increase in life expectancy and the likelihood/expectation that boomers will work past traditional retirement ages.

There's more good news. Not only will there not be a stock market meltdown when the boomers retire, the rates of return on assets such as stocks and bonds will be little changed from historical averages.

Time to make smart money choices

So what's the catch? What's the bad news? Well, for starters, the GAO already revealed some of its hand. Boomers don't have any assets. What's more, boomers will not be able to rely on the stock market returns making up for their paltry savings rate. That means, says the GAO, boomers will have to get cracking. They will have to start savings and managing their money. And to do that the GAO says boomers will have to start cracking the books, becoming much more financially literate than they are now.

Do experts agree with the GAO's assessment? In short, yes.

James Poterba, the Mitsui Professor of Economics and the head of the MIT economics department, said in an e-mail the GAO's general conclusion about the likely impact of population aging on markets overall is consistent with work he published several years ago. What's more, he agreed that "future retirees are going to face greater uncertainties than those who retired in the 1980s and 1990s faced, and that as a result financial literacy is going to be more important than it has been in the past."

The GAO's assessment of the boomers' impact on future rates of return for assets is also right on.

"Economists' analyses generally show small effects of demographic swings on asset prices and rates of return," John Laitner, director of the Michigan Retirement Research Center said in an e-mail. "Business cycles, changes in technology, and international capital flows seem, for example, potentially more significant. Several such studies are, in fact, cited in the recent GAO report on baby boomer retirement." Read the GAO report here.

But what experts really agree on is the fact that boomers will need to get smart about money, save more and plan on working longer.

Laitner, for instance, said that some of the greatest concerns are whether the boomers will work long enough and have sufficient savings to maintain in retirement the standard of living to which they are accustomed, where the resources — both public and private — will come from to support their medical expenses and how defaults on those pensions that are poorly financed will be covered.

House rich?

Zvi Bodie, the Norman and Adele Barron Professor of Management at Boston University, noted in an e-mail that for those with insufficient assets, the most realistic advice is probably to plan on postponing retirement and saving more. And that's especially so for those who plan to tap into the equity in their home to finance a portion of their retirement.

Alicia Munnell, director of the Center for Retirement Research at Boston College, said in an e-mail that while the GAO study is consistent with Boston College's read of the existing evidence on financial assets, the GAO's assessment may not apply to housing, which is a major asset for most people entering retirement.

"The housing market is more of a domestic, rather than global, environment and therefore the contour of the population may have more of an impact here," she said.

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