The Demographic Wave

The following animation (from Calculated Risk, using Census Bureau data), which updates every second, shows the wave of demographic changes from 1900-2060.


The additional numbers of older Americans (and thus retirees and, by implication, the need for better retirement saving and planning) going forward — as the Baby Boomer generation retires — should be obvious.

Open Questions re the Longevity Crisis

I wrote earlier today about yesterday’s new report from the Census Bureau about the explosive growth seen in the number of people aged 90 and above in the United States.  There has been a fair amount of conjecture over the past several months about what demographic change will mean for the markets, but there is nothing like consensus on the subject. 

According to researchers from the Federal Reserve Bank of San Francisco, historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. Obviously, the aging of the baby boom generation is a key demographic trend. As they reach retirement age, they may shift from buying stocks to selling their equity holdings to finance retirement. Statistical models described in the report suggest that this shift could be a factor holding down equity valuations over the next two decades. Rob Arnott describes the “3-D” risks (debt, deficits and demographics) very well here

On the other hand, Wharton’s Jeremy Siegel, author of Stocks for the Long Run, says that growth in developing countries should generate enough demand to absorb a baby-boomer selloff and “keep stock prices high.”  A Congressional Budget Office background paper published in 2009 supports Siegel’s view, arguing that Boomers won’t sell assets very rapidly to finance retirement on account of several factors.

  1. Boomers will be careful — they are concerned that they might live longer than expected or might face higher than anticipated medical costs.
  2. Boomers desire to transfer assets to the next generation, which should also blunt asset sales.
  3. Since the wealthiest one percent of Americans own about one-third of the nation’s financial assets and, for the most part, the very wealthy don’t sell assets to finance retirement, this asset concentration will help to keep demand steady.
  4. Many Boomers may work longer than they otherwise would have due to losses of retirement assets due to the 2008-09 financial crisis (but the empirical evidence on this point is inconclusive and the impact might be small).

The CBO conclusion:

“Although the retirement of the baby boomers is not likely to cause a large decline in aggregate demand for assets, several economic studies suggest that the retirement and aging of baby boomers could cause a temporary decrease in asset prices. … Empirical evidence, however, has not revealed much connection between demographic trends and the changes observed in financial markets.”

Moreover, some observers have questioned whether longevity will continue to increase in this country at historical rates on account of the <pun warning> expanding obesity problem. Life expectancy growth overall may mask wide local disparities, according to a recent study. Men in Holmes County, Mississippi, for example, have a life expectancy of 65.9 years, the same as men in Pakistan and 15.2 years behind men in Fairfax, Virginia. Gaps between America’s counties have widened since the early 1980s. Most alarming, 702 counties, or 30% of those studied, saw a statistically significant decline in life expectancy for women from 2000 to 2007; 251 counties saw a statistically significant decline for men.

Moreover, America’s advances on the national level have lagged behind those of other developed countries. A panel at the National Research Council recently reported that for American women, a rise in life expectancy of 3.3 years from 1980 to 2007 amounted to just 60% of the gains in other rich countries.  The question is why these trends have developed.  Some have suggested that obesity is capping life expectancies.  For example, this paper contends that obesity threatens progress in life expectancy. However, Australia has bulging waistlines much like America and its life expectancies continue to grow nicely. 

Since we know that U.S. lifespans have been limited by smoking and that tobacco use has been reduced dramatically, it is unclear whether these life expectancy disparities will continue going forward.  James Vaupel, director of Duke University’s Population Research Institute, is skeptical of the argument that obesity may reverse future progress in life expectancy. More worrying, he says, is that rising obesity will lead to higher levels of disability.

Accordingly, further study will be needed to ascertain what the markets will look like as the American population ages and even the extent to which longevity will continue to increase.  Open questions remain.

Older and Overconfident

Back in the early 70’s, a hair color product called “Loving Care” pitched women by telling them “you’re not getting older, you’re getting better” (video here).  Sadly, and as is so often the case, reality and advertising don’t correlate. And since I am getting decidedly older (I just had a birthday), this new research makes me especially nervous.  The study shows that irrespective of education level or gender, Americans become considerably less literate about money matters after age 60 while becoming increasingly confident that their decisions are the right ones.  It’s a recipe for disaster.

The authors of the study gave a test measuring knowledge of investments, insurance, credit and money basics to over 3,000 subjects of various ages and found “a statistically strong and consistent decline in financial literacy among older respondents.”  More specifically, financial literacy dropped about 2% each year starting after age 60, falling from about 59% correct on the test of pretty basic financial information — hardly a great score — for those in their 60s to a dreadful 30% for those 80 and above.  At the same time their abilities are declining their confidence is growing (and not just about money).

This news is particularly troubling because we are asking seniors to do so much more financial maneuvering today.  They are being asked to consider delaying retirement and Social Security, to manage their retirement portfolios and withdrawal rates (more and more often without pension income), to make decisions about annuitization and guaranteed income, to deal with long-term care, and more. 

Those of us who are getting closer to 60 than we might like would be well advised to make sure our “financial house” is in good order, that our long-term plans are in writing and shared with our families, and to at least consider the value of a competent and trusted advisor to help manage our finances and (increasingly) ourselves.


The drawing used to illustrate this post on the front page is by Carl Richards and is from his engaging Behavior Gap website.