What Will Happen to Financial Markets When the Baby Boomers Retire?
IMF Working Papers, January 1, 2000
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- What Will Happen to Financial Markets When the Baby Boomers Retire?
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Bibliographic details
- Authors: Robin Brooks
- Published: January 1, 2000
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451843637.001
Summary / Research question
- Explores whether changes in the age distribution have significant effects on financial markets that are rational and forward-looking.
- Presents an overlapping generations model in which agents make a portfolio decision over stocks and bonds when saving for retirement.
- Uses the model to simulate a baby boom-baby bust and evaluates implications for asset returns and the equity premium.
- Highlights relevance for debates on reforming pay-as-you-go pension systems, which often take historical returns on financial assets—and on the equity premium—as given.
Model and methodology
- Overlapping generations (OLG) framework with portfolio choice between stocks and bonds during saving for retirement.
- Simulation of a baby boom-baby bust demographic shock to assess generational returns under rational, forward-looking markets.
Key findings
- Returns to baby boomers will be substantially below returns to earlier generations, even when markets are rational and forward-looking.
- This generational return differential arises from the demographic structure simulated (baby boom followed by baby bust).
- Implication: historical returns on financial assets and the equity premium cannot be assumed invariant when assessing pension reform or projecting future asset returns.
Policy implications and relevance
- Important for reform of pay-as-you-go pension systems because reliance on historical asset returns (including the equity premium) may be misleading if demographic shifts materially alter equilibrium returns.
- Pension reform analysis should account for potential asset market effects stemming from population aging and cohort size variation.
Publication and metadata
- Author: Robin Brooks
- Date: January 1, 2000
- Series: Working Paper No. 2000/018
- Issue: 018
- Volume: 2000
- Pages: 36
- DOI: https://doi.org/10.5089/9781451843637.001
- Stock No: WPIEA0182000
- ISBN: 9781451843637
- ISSN: 1018-5941
- Subjects: Consumption, Financial institutions, Financial markets, Income, Labor, National accounts, Retirement, Securities markets, Stocks, Wages
- Keywords: Africa, algorithm proceeds, Asia and Pacific, asset market effect, asset market implication, baby boom-baby bust, bond holding, bond return fall, Consumption, Consumption-Saving model, descriptive statistics, equity premium, expected return, Income, pension reform, population aging, Retirement, return differential, riskless asset, Securities markets, Stocks, wage income, Wages, WP
IMF Working Paper No. 2000/018.
Content in this bundle
- What Will Happen to Financial Markets When the Baby Boomers Retire? - WP/00/18