Suddenly various commentators — the usual suspects — have raised dire warnings about market prospects. They fear that the retirement of the large baby-boom generation will force selling and drive down prices. Some have called for an imminent crash. Financial advisers see their older clients liquidating investments to support their retirement needs and have embrace the fear. But if this story, like so many other scare stories, harbors a kernel of truth, this heavily publicized worry is vastly overstated.
The broad demographic picture certainly is capable of raising fear. According to the Bureau of the Census, low birth rates will continue to slow the flow of young people into the workforce, while increasing longevity will enlarge the proportion of dependent retirees. The number of working-age people will fall from an already low 5.2 for each retiree today to barely 3.3 by 2030. Since retirees tend to draw on pensions and their own savings to support themselves after they have left off active production, these demographic patters naturally raise fears of net liquidations in financial markets and so downward price pressure, especially since the relative shortfall of working-age in the population means that the nation will also have proportionally fewer people saving, contributing to pension plans, and generally replenishing the pool of investable assets.
While this picture leaves reason for many longer-term economic and financial concerns and will force many changes in this economy and its markets, at least four points raise doubts about these particular, immediate, market concerns.
- The changing demographics will alter retirees’ investment strategies. Decades ago people had to support five, maybe ten years of retirement. All but the wealthiest converted assets, largely to bonds, as the retirement date approached and then draw down a significant part of that asset base each year. But today, when people can contemplate 20 or more years of retirement, such old practices no longer seem so wise. Retirees will draw down on their asset base much more slowly than their fathers and mothers did in retirement. They will strive to protect the principal of their investment base much more carefully. Indeed, their planning horizon is so long that they will tend to keep much more of their portfolio in equities for longer than once was the case.
- The changing nature of the investment industry further suggests that funds will move much less dramatically than the doomsayers suggest. As financial advisors shift increasingly toward a fee-based instead of a transaction-based business model, they will become less eager certainly than they once were to move assets about. Registered Investment Advisors (RIAs), already 25 percent of the nation’s wealth-management business and growing fast, are almost all fee-based. Even the wire houses, once the center of transaction-based brokerage, are moving toward the fee-based model. Morgan Stanley Wealth Management, the nation’s largest, reports 37 percent of its assets are fee-based. Bank of America’s Merrill Lynch reports 44 percent, and Wells-Fargo 27 percent. The proportions are growing, too, even as the overall dollar amounts rise.
- Pension funds are less likely to liquidate, too. Indeed, they face legal restraints that should prevent much of a drawdown in assets. Social Security excepted, all pension funds, even those run by state and local governments, must by regulation maintain an acceptable level of funding. If contributions from the existing workforce cannot support that level, then the sponsor of the fund must direct other revenues toward it. Corporations will have to channel revenues toward pension investments, and public authorities will have to direct tax monies to their funds, effectively putting funds into financial markets to supplement any shortfall.
- Any impact will face delay. Although the long post-World-War-II baby boom is indeed beginning to retire, the biggest birth years of that boom came toward its end, between 1958 and 1961. The birth rate figures of the time tell the story. At the beginning of the baby boom in the late 1940s, the birth rate was just over three children in the average woman’s lifetime. That figure rose throughout much of the 1950s, and by 1957 it had reached 3.7, a gain by about 20 percent. The rate stayed at that high level until 1961, when it began its long decline. As a consequence, the bulk of the baby boom is not retiring now or any time soon. Rather, it has enlarged the part of the population in its 50s, a decade well recognized as the highest earning and highest saving period in a person’s lifetime. Even as the beginning of the baby boom is retiring, then, the bulk of it is earning, saving, building up pension assets, and more than offsetting any drawdown from the older, smaller, retiring part. These people will not reach normal retirement age until 2022-23, and they will not likely begin their drawdown until later, suggesting that any real problems are 8-10 years off at least, time enough for advisors to shift portfolio strategy, if it is necessary, and time enough for many other things to change.
This less frightening picture does not ignore the ill effects of the demographic trends. It recognizes the very real and detrimental financial and economic impact from the growing mismatch between dependent retirees on the one hand and taxpaying, saving, pension-contributing producers on the other. This fact of life in the United States will weigh heavily in coming years and force dramatic change in business practice, production emphasis, and public policy, as an earlier series in this space described. But the panic over the immediate market impact is misplaced and sadly typical of those who prefer drama to probability.