For tens of millions of baby boomers and younger workers, the basic long-range financial plan is simple: accumulate stocks and bonds while working, then slowly sell them off to keep up a comfortable lifestyle in retirement.
Not so fast, says Jeremy Siegel, the Wharton School finance professor well-known until now for recommending stocks as a long-term investment. In speeches and a new book -- The Future for Investors, he is warning that a flood of boomer retirees with trillions of dollars of assets to sell over the next 20 to 40 years threatens to crush stock and bond prices.
He says it will take a massive investment in U.S. stocks by people in India, China and other developing countries to prevent a market meltdown.
Robin Brooks, an economist at the International Monetary Fund, scoffs at the warning. He thinks the wealthy individuals who own a large percentage of U.S. stock won't need to sell, and companies may boost dividends so retiree investors can hang on to their shares.
As politicians debate Social Security, economists are debating the future of another plank of Americans' retirement plans: the stock market. The ratio of working-age people to retirees will decline over the next 30 years to an estimated 2.6 to 1 from 4.9 to 1 today. Simple supply-and-demand economics suggests that as retirees dump their holdings into a thin market, stock prices could plummet.
But will they? Siegel says it's possible to take some common-sense assumptions -- for example, that people will continue trying to retire in their early 60s -- and show in an economic model that stocks are in for trouble. "God knows, I want to be an optimist," he says. "But I don't think there will be enough assets from U.S. sources going forward to pay for people's retirement."
Brooks contends that even if demographic trends do hit elderly people's pocketbooks, those without savings who depend on government assistance will bear the brunt. History shows, he says, that it's impossible to predict big macroeconomic changes decades in advance -- the global economy simply has too many moving parts.
Brooks argues it's unlikely that a rush among retirees to maintain their living standards would put pressure on stocks. The richest 1 percent of the U.S. population owns about 53 percent of the stock in individual hands, according to Federal Reserve data from 2001.
"Whether we will see some sort of crash or slow crumble over the next decade or so, I don't know," says Andrew Abel, another finance professor from the Wharton School at the University of Pennsylvania. "But it is certainly likely enough that it has got to enter into people's planning."
By E.S. Browning
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