Will Retiring Boomers Sink The Stock Market?

Demographics may not quite be destiny, but they sure have a powerful impact on the economy. That has been especially true for the group of people born between 1946 and 1964, the so-called baby boom generation. Recently, congressional policymakers held hearings on the likelihood of baby boomers' overwhelming the current Social Security system during their retirement years, roughly 2010 to 2050.

Now it turns out that retiring baby boomers may pose problems for the private, employer-sponsored pension system as well. That's the conclusion of a recent paper by John Shoven, economist at Stanford University, and Sylvester Schieber, an employee-benefits specialist at the Wyatt Co. Using the same demographic and work-force characteristics underlying the government's Social Security projections, and making assumptions about investment rates of return and asset allocations, the authors project that the employer pension system will shift from a huge net buyer of assets to a net seller, probably in the third decade of the next century.

The impact on the stock, bond, and other capital markets could be huge. They predict that benefits will first exceed employer contributions in 2006 and that asset growth will slow sharply. If that's the case, America's pension funds will no longer be a major source of new investment funds for the economy and could well put enormous downward pressure on prices in the bond and stock markets.

Shoven and Schieber argue that employers would be putting more money into pension plans right now had the government not put restrictions on employer contributions to pension and profit-sharing plans in order to reduce company tax credits. For example, the 1993 budget deficit-reduction bill cut the level of individual employee's compensation that can be considered in funding and contributing to 401(k) plans. With an extraordinarily large number of retirees, removing constraints on employer contributions could bolster a baby boomer's prospects for a financially healthy retirement.