At the same time, life expectancy  is increasing. Consequently, relatively fewer workers will be supporting those receiving  Social Security and Medicare benefits, which play an important role in  helping older Americans meet their retirement needs. In addition to their saving and consumption patterns, baby boomers also  may affect stock returns in particular through broader macroeconomic  channels. Financial Evidence from Baby Boomers and Current Retirees Does Not Suggest a Sharp Decline in Asset Prices

Our analysis of national survey data indicates that the baby boom  generation is not likely to precipitate a sharp and sudden decline in  financial asset prices as they retire. Concentration of Financial Assets among a Minority of Baby Boomers May Lessen Their Market Effect

The potential for the baby boom generation to precipitate a market  meltdown in retirement may be substantially reduced by the fact that a  small minority of this population holds the majority of the generation’s  financial assets. To the extent that baby  boomers behave like current retirees, a rapid and mass sell off of financial  assets seems unlikely. To the extent that this shift means that boomers  have an increased share of retirement wealth held as savings instead of as  income, this may require boomers to sell more assets to produce  retirement income than did previous generations. If boomers are confronted  with higher than expected health care costs in retirement, they would have  a greater need to spend down their assets. In addition, the expected increase in the number of baby boomers working  past age 62 may also reduce the likelihood of a dramatic decline in  financial asset prices. The Role of Housing, a Key Asset for Baby Boomers in Retirement Security, Continues to Evolve

Housing represents a large portion of most baby boomers’ wealth and their  management and use of this asset may have some effect on their decisions  to sell assets in the financial markets. Financial industry representatives whom we interviewed also  generally expect the baby boom retirement not to have a significant  impact on financial asset returns because of the concentration of assets  among a minority of boomers, the possibility of increased global demand  for U.S. assets, and other reasons. Similarly, most of the  empirical studies, which statistically examined the impact of past changes  in the U.S. population’s age structure on rates of return, suggested that the  baby boom retirement will have a minimal, if any, effect on financial asset  returns. These factors could  dampen the effect of the baby boomer retirement on the markets. Broad Economic Factors Will Likely Have a Greater Impact on Financial Markets Than Will Demographics

Our statistical analysis indicates that macroeconomic and financial factors  explain more of the variation in historical stock returns than population  shifts and suggests that such factors could outweigh any future  demographic effect on stock returns. Baby Boomers and Future Generations Likely to Increasingly Rely on Their Own Savings, Placing Greater Importance on Rates of Return and Financial Management Skills

While the baby boom retirement is not likely to cause a sharp decline in  asset prices or returns, the retirement security of boomers and future  generations will likely depend increasingly on individual saving and rates  of return as guaranteed sources of income become less available. However, studies have  found that many individuals have low financial literacy. The long-term financial weaknesses of Social Security and  Medicare, coupled with the uncertain future policy changes to these  programs’ benefits, and the continued decline of the traditional DB  pension system indicate a shift toward individual responsibility for  retirement. To assess the role rates of return will play in providing retirement income  in the future, we synthesized findings from the analysis of financial asset  holdings to draw conclusions about the risk implications for different  subpopulations of the baby boom and younger generations.
Why GAO Did This Study

The first wave of baby boomers(born between 1946 and 1964) will become eligible for Social Security early retirement benefits in 2008. In addition to concerns about how the boomers' retirement will strain the nation's retirement and health systems, concerns also have been raised about the possibility for boomers to sell off large amounts of financial assets in retirement, with relatively fewer younger U.S. workers available to purchase these assets. Some have suggested that such a sell-off could precipitate a market "meltdown," a sharp and sudden decline in asset prices, or reduce long-term rates of return. In view of such concerns, we have examined (1) whether the retirement of the baby boomers is likely to precipitate a dramatic drop in financial asset prices; (2) what researchers and financial industry participants expect the effect of the boomer retirement to have on financial markets; and (3) what role rates of return will play in providing retirement income in the future. We have prepared this report under the Comptroller General's authority to conduct evaluations on his own initiative as part of the continued effort to assist Congress in addressing these issues.

What GAO Found

Our analysis of national survey and other data suggests that retiring boomers are not likely to sell financial assets in such a way as to cause a sharp and sudden decline in financial asset prices. A large majority of boomers have few financial assets to sell. The small minority who own most assets held by this generation will likely need to sell few assets in retirement. Also, most current retirees spend down their assets slowly, with many continuing to accumulate assets. If boomers behave the same way, a rapid and large sell off of financial assets appears unlikely. Other factors that may reduce the odds of a sharp and sudden drop in asset prices include the increase in life expectancy that will spread asset sales over a longer period and the expectation of many boomers to work past traditional retirement ages. A wide range of academic studies have predicted that the boomers' retirement will have a small negative effect, if any, on rates of return on assets. Similarly, financial industry representatives did not expect the boomers' retirement to have a big impact on the financial markets, in part because of the globalization of the markets. Our statistical analysis shows that macroeconomic and financial factors, such as dividends and industrial production, explained much more of the variation in stock returns from 1948 to 2004 than did shifts in the U.S. population's age structure, suggesting that demographics may have a small effect on stock returns relative to the broader economy. While the boomers' retirement is not likely to cause a sharp and sudden decline in asset prices, the retirement security of boomers and others will likely depend more on individual savings and returns on such savings. This is due, in part, to the decline in traditional pensions that provide guaranteed retirement income and the rise in account-based defined contribution plans. Also, fiscal uncertainties surrounding Social Security and rising health care costs will ultimately place more personal responsibility for retirement saving on individuals. Given the need for individuals to save and manage their savings, financial literacy will play an important role in helping boomers and future generations achieve a secure retirement.