What Will Happen to Financial Markets When the Baby Boomers Retire?
37 Pages Posted: 31 Jan 2006
Date Written: February 2000
Abstract
This paper explores whether changes in the age distribution have significant effects on financial markets that are rational and forward-looking. It presents an overlapping generations model in which agents make a portfolio decision over stocks and bonds when saving for retirement. Using the model to simulate a baby boom-baby bust demonstrates that returns to baby boomers will be substantially below returns to earlier generations, even when markets are rational and forward-looking. This result is important because the current debate over how to reform pay-as-you-go pension systems often takes historical returns on financial assets -and on the equity premium- as given.
Keywords: equity premium, population aging, pension reform
JEL Classification: E27, G11, G12, H55
Suggested Citation: Suggested Citation
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