Newswise — The impact of the baby-boomer generation's aging and retirement is already raising concerns when it comes to health-care costs, employment and social security. Add another reason to worry about the aging boomers: their impact on the stock market. According to research at the Olin School of Business at Washington University in St. Louis, retirees don't invest as much as younger workers, which could mean a blow to Wall Street when boomers pull out of the workforce.
"When you have voluntary retirement age, as we do in the United States, people tend to invest more from an earlier age," says Hong Liu, associate professor of finance at the Olin School of Business. "People are willing to take on more risk when they are younger. At that time in their lives they know that if their investments don't pan out, they can always work longer in their lives to make up for it."
However, the closer people get to retirement, the less risk they're willing to take, Liu says. By the time they retire, most people shift their assets to less-dicey investments. That strategy is logical. However, when millions of baby boomers follow that pattern, the impact on the stock market could be formidable. Fewer people investing in the market means the market will weaken, which is a problem European markets probably won't see.
"In countries with mandatory retirement, we don't expect people to shift out of their stock investments when they stop working," Liu says. "This is because they know exactly when they will retire and thus shift their portfolio long before retirement."
Americans, however, have spent much of their investing years hedging against their date of retirement. They also have the comfort of knowing that a reliable insurance policy will help buoy them should tragedy strike. Yet when retirement comes, Hong says, Americans find they don't have much savings to fall back on. It may sound counter-intuitive, but the low savings rate could be seen as a sign of a successful insurance industry.
"We find that in countries with a well-established insurance industry, people are willing to invest and consume more but save less because of the safety net of their insurance," Hong says. "China exemplifies what happens without an insurance industry: stock market participation is low, consumption is low and savings are high. All because the Chinese know that they need to save for the bad days."
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