Will Baby Boomers Sell Off Their Stocks?

Will the retirement of 79 million baby boomers shake stock prices?

It's a contentious point for those who study markets. Jeremy Siegel, a Wharton School finance professor whose popular 1994 book, "Stocks for the Long Run," predated the equities bull market, has been warning in speeches and a new book that stock sales by baby boomers could shatter stock and bond prices.

He isn't the first to suggest boomer retirements could push asset prices lower.

"The question that begs to be answered is who is going to be buying the assets that the pension funds will be selling and at what prices," Stanford University economist John Shoven said in 1995, following the publication of a paper he co-authored on the topic.

He cautioned then that he wasn't saying assets would decline, just that "returns will likely not be as high as they have been in the last decade" and could be off by as much as one-third. That's not a Depression-level drop, but it is similar to the decline of the 1970s.

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Others who have studied the topic say a possible decline would be hard to predict.

Andrew B. Abel, who teaches economics and finance at Wharton, said his work on the topic is "very theoretical and abstract" using a model that simulates overlapping generations, with younger people beginning to invest at the same time older people sell.

"It's really hard to go from that theoretical abstraction that measures time in generations and figure out what calendar time would be," he said.

Abel and others who have wrestled with the topic say it's worth remembering that boomers didn't all do the exact same thing at the exact same time. Boomers "married at different ages, had children at different ages," he said. "It all gets blurred. That's why it would be very hard to predict, or even detect, this."

John Gist, associate director, AARP Public Policy Institute, amplified that point, saying the baby boom generation includes people who are three months away from retirement as well as people who are 42.

And the generation that's following them is fairly large, Gist added. "There's going to be plenty of buyers of stocks. This is going to be a fairly gradual phenomenon."

Other sources of volatility are larger and less predictable, said Robin Brooks, a senior economist in the Asia and Pacific Department at the International Monetary Fund. By contrast, investors know a demographic change is coming and can price that into equities.

"In the scheme of things, there are many other sources of volatility that impact the market: GDP growth, oil prices and other shocks," said Brooks, who does not speak on behalf of the International Monetary Fund. "Demographics is very slow moving and very predictable; other sources of uncertainty aren't. If oil prices spike to $90 a barrel, that's difficult to predict."

The concentration of stock ownership among the nation's wealthiest people also mitigates against a sudden equities selloff, Brooks said. One estimate is that the top 10 percent of the income distribution holds 90 percent of equities. They won't need to sell their stocks to pay the rent.

If smaller investors sell equities, "very wealthy guys with a longer horizon might buy equities," Brooks said.

Another possibility is that corporations could increase their dividend payments, so investors could hold on to equities and live off the dividend income.

Others have suggested that a broader market for U.S. stocks could emerge as the middle class grows in countries with a much younger population, such as India.

Said AARP's Gist, "It's probably not going to be a catastrophe like some people have speculated."

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