This is the accessible text file for GAO report number GAO-06-718 
entitled 'Baby Boom Generation: Retirement of baby Boomers Is Unlikely 
to Precipitate Dramatic Decline in Market Returns, but Broader Risks 
Threaten Retirement Security' which was released on July 28, 2006. 

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GAO: 

United States Government Accountability Office: 

Report to Congressional Committees: 

July 2006: 

Baby Boom Generation: 

Retirement of Baby Boomers Is Unlikely to Precipitate Dramatic Decline 
in Market Returns, but Broader Risks Threaten Retirement Security: 

Baby Boom Generation Baby Boom Impact: 

GAO-06-718: 

GAO Highlights: 

Highlights of GAO-06-718, a report to congressional committees 

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. 

Figure: Distribution of Baby Boomer Financial Assets, by Wealth 
Percentiles: 

[See PDF for Image] 

Source: GAO analysis of 2004 Survey of Consumer Finances. 

[End of Figure] 

What GAO Recommends: 

GAO is not making any recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-718]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Barbara Bovbjerg at (202) 
512-7215 or bovbjergb@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Financial Evidence from Baby Boomers and Current Retirees Does Not 
Suggest a Sharp Decline in Asset Prices: 

Researchers and Financial Industry Representatives Largely Foresee 
Little to No Impact on Financial Markets as the Baby Boomers Retire: 

Baby Boomers and Future Generations Likely to Increasingly Rely on 
Their Own Savings, Placing Greater Importance on Rates of Return and 
Financial Management Skills: 

Concluding Observations: 

Agency Comments: 

Appendix I: Scope and Methodology: 

Appendix II: Bibliography of Simulation-Based and Empirical Studies: 

Appendix III: Summary of the Simulation-Based and Empirical Studies 
Assessing the Impact of a Baby Boom on Financial Markets: 

Appendix IV: Econometric Analysis of the Impact of Demographics on 
Stock Market Returns: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Pension Coverage by Plan Design, 2004, as Percentage of Birth 
Cohort: 

Table 2: Simulation-Based Studies Assessing the Impact of a Baby Boom 
on Financial Markets: 

Table 3: Empirical Studies Assessing the Impact of a Baby Boom on 
Financial Markets: 

Table 4: Names, Definitions and Data Sources of Variables Used in Our 
Regression Models: 

Table 5: Stock Market Returns Regression Results--Baseline Model: 

Table 6: Stock Market Returns Regression Results--Middle Age Model: 

Table 7: Stock Market Returns Regression Results--Change in Middle Age 
Model: 

Table 8: Stock Market Returns Regression Results--Middle-Young Ratio 
Model: 

Table 9: Stock Market Returns Regression Results--Change in Middle- 
Young Ratio Model: 

Figures: 

Figure 1: U.S. Elderly Dependency Ratio (Population Age 65 and Older 
Relative to Age 15 to 64), 1950-2000 and Projected 2005-2050: 

Figure 2: Distribution of Baby Boomer Financial Assets, by Wealth 
Percentiles: 

Figure 3: Percentage of Baby Boomers Who Own Financial Assets and Their 
Use of Different Investment Accounts: 

Figure 4: Total Financial Assets Held by Boomers and the Rest of the 
U.S. Population: 

Figure 5: 2004 U.S. Resident Population, by Birth Year: 

Figure 6: Share of the U.S. Population Age 65 and Older, Projected to 
2050: 

Figure 7: Labor Force Participation Rates for Americans, Ages 55 and 
Older: 

Figure 8: Sources of Stock Market Return Variation: 

Figure 9: Individual Retirement Account and Defined Contribution 
Pension Balances for Older and Younger Baby Boomers, 2003: 

Figure 10: Allocation of Assets of Baby Boomers, By Wealth Quartiles: 

Abbreviations: 

DB: defined benefit: 

DC: defined contribution: 

EBRI: Employee Benefit Research Institute: 

HRS: Health and Retirement Study: 

IRA: Individual Retirement Account: 

S&P: Standard & Poor's: 

SCF: Survey of Consumer Finances: 

United States Government Accountability Office: 
Washington, DC 20548: 

July 28, 2006: 

Congressional Committees: 

The aging of the U.S. population is expected to present great fiscal 
and economic challenges in the decades ahead. The first wave of the 
baby boom generation, the 78 million Americans born between 1946 and 
1964 and alive as of 2005, will turn age 62 and become eligible for 
Social Security benefits beginning in 2008. The retirement of the 
relatively large baby boom generation, combined with other demographic 
trends, is expected to strain the nation's retirement and health 
systems.[Footnote 1] This impending event has also raised concerns 
about the potential market effect should baby boomers sell off large 
amounts of financial assets in retirement. If proportionally fewer 
workers are available to buy these assets, some market observers fear 
that the increase in supply of stocks, bonds, and other financial 
assets relative to demand may place downward pressure on asset prices. 
At the extreme, some observers have raised the possibility of a market 
"meltdown," a sharp decline in stock or other asset prices, 
precipitated by the baby boom retirement. In contrast, others have 
noted that such an outcome could be mitigated by a rising demand for 
U.S. financial assets from developing countries and by immigration. 

Returns on investment are important in helping many Americans 
accumulate sufficient savings throughout their working lives to meet 
their retirement needs. From 1946 to 2004, U.S. stocks have returned an 
average of 8.0 percent annually, adjusted for inflation. From 1986 to 
2004, U.S. 10-year Treasury notes have yielded an annual average of 3.4 
percent, adjusted for inflation. Importantly, returns on financial 
assets provide retirement income for many Americans, accounting for 
12.6 percent of total income for Americans age 65 and over in 2004, and 
over half of this cohort received some income from financial assets. If 
the baby boom retirement were to reduce asset returns, retirees would 
generate less income from investments and workers would have more 
trouble saving adequately for retirement. 

In view of such concerns, we have examined (1) whether the retirement 
of the baby boom generation is likely to precipitate a dramatic drop in 
financial asset prices; (2) what researchers and financial industry 
experts expect the effect of the baby boom retirement to have on the 
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 a continued effort to assist Congress in 
addressing these issues. 

To analyze whether the retirement of the baby boom generation is likely 
to precipitate a dramatic drop in financial asset prices, we examined 
financial information from the Survey of Consumer Finances (SCF) to 
determine what financial assets are held by baby boomers and the Health 
and Retirement Study (HRS) to determine how current retirees spend down 
their assets.[Footnote 2] To identify the views of researchers and 
outside experts on the financial effects of the baby boom retirement, 
we reviewed simulation-based and empirical studies analyzing the baby 
boom generation's impact on financial markets and interviewed financial 
and public policy experts from mutual fund companies, pension funds, 
life insurance companies, broker-dealers, financial planning 
organizations, and financial industry trade associations. We also 
conducted our own econometric analysis of the historical importance of 
demographics on financial asset returns. To assess the role rates of 
return will play in providing retirement income, we reviewed past GAO 
reports, academic literature, and obtained insights from interviews 
with outside experts. We conducted our work between August 2005 and 
June 2006 in accordance with generally accepted government auditing 
standards. A more extensive discussion of our scope and methodology 
appears in appendix I. 

Results in Brief: 

Our analysis of national survey and other data suggests that baby 
boomers would be unlikely to sell enough financial assets in retirement 
to precipitate a market meltdown, or a sudden and sharp decline in 
asset prices. First, a large majority of boomers have few financial 
assets to sell, and the small wealthy minority that holds the large 
majority of this generation's assets will likely need to sell little, 
if any, of their assets in retirement.[Footnote 3] Our examination of 
the 2004 SCF shows that the wealthiest 10 percent of boomers own about 
two-thirds of the financial assets held by this generation, excluding 
assets held indirectly in defined benefit (DB) pensions. About one- 
third of all boomers do not own any assets in stocks, bonds, mutual 
funds, or retirement accounts. Second, if baby boomers behave like 
current retirees, a rapid and large sell off of financial assets also 
appears unlikely. Our analysis of data on current retirees' saving and 
investment behavior reveals that most retirees slowly spend down their 
assets in retirement, with many actually continuing to accumulate 
assets. Other factors that would mitigate against a sharp and sudden 
decline in asset prices include the 19-year span over which boomers 
will reach retirement age, the extended life expectancy of boomers, and 
the expected increase in boomer employment past traditional retirement 
ages, which would facilitate additional asset accumulation and reduce 
the need to sell assets to provide retirement income. Finally, to the 
extent that boomers may be less reluctant than prior generations to 
treat their homes as a source of retirement income through such 
strategies as reverse mortgages, they may also depend less heavily on 
selling their financial assets for income. 

Researchers and financial industry representatives largely expect the 
baby boom retirement to have little or no effect on stock and bond 
markets. Studies that used models to simulate the market effects of a 
hypothetical baby boom followed by a baby bust generally predicted that 
the baby boom retirement will have a small, negative effect on 
financial asset returns. Similarly, most of the empirical studies, 
which statistically examined the impact of past changes in the U.S. 
population's age structure on stock returns and bond yields, suggested 
that demographic shifts have had a minimal or no effect on stock 
returns or bond yields. In addition, financial industry representatives 
whom we interviewed generally did not expect the baby boomers to have a 
significant impact on the financial markets when they retire. They said 
factors that could slow the sale of assets or increase demand and 
thereby mitigate any demographic effect included the possibility that 
the minority of boomers who own the majority of financial assets will 
likely bequeath rather than sell their assets, boomers will hold stock 
well into retirement to hedge inflation and the risk of outliving their 
savings, and international factors such as immigration and an increase 
in asset demand from developing countries. Finally, our statistical 
analysis indicates that macroeconomic and financial factors, such as 
dividends and industrial production, have explained more of the 
variation in stock returns from 1948 to 2004 than shifts in the U.S. 
population's age structure--suggesting that such factors could outweigh 
any future demographic effect on stock returns. 

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 
savings and the returns these savings can earn. The decline in 
traditional DB pensions that provide income for life and their 
replacement with account-based defined contribution (DC) plans mean 
that fewer boomers will have a dependable income during retirement 
other than that from Social Security. However, fiscal uncertainties 
about Social Security's solvency may result in reduced future benefits 
for certain age groups and income levels, thereby placing more 
responsibility for saving on individuals. Collectively, these trends 
would increase the dependence of individuals on rates of return to 
accumulate enough financial assets at retirement and to produce 
sufficient income from their assets during retirement. Given the need 
for individuals to rely increasingly on their ability to manage their 
own accumulation and spending of assets and savings, financial literacy 
will likely play an ever important role in the retirement security of 
baby boomers and future generations. 

Background: 

In the 21st century, older Americans are expected to comprise a larger 
share of the population, live longer, and spend more years in 
retirement than previous generations. The share of the U.S. population 
age 65 and older is projected to increase from 12.4 percent in 2000 to 
19.6 percent in 2030 and continue to grow through 2050. At the same 
time, life expectancy is increasing. By 2020, men and women reaching 
age 65 are expected to live another 17 or 20 years, respectively. 
Finally, falling fertility rates are contributing to the increasing 
share of the elderly population. In the 1960s, the fertility rate was 
an average of three children per woman.[Footnote 4] Since the 1970s, 
the fertility rate has hovered around two children per woman, meaning 
relatively fewer future workers are being born to replace retirees. The 
combination of these trends is expected to significantly increase the 
elderly dependency ratio--the number of people age 65 and over in 
relation to the number of people age 15 to 64. In 1950, there was 1 
person age 65 or over for every 8 people age 15 to 64. By 2000, the 
elderly dependency ratio had risen to 1 person age 65 for every 5 
people of traditional working age, and by 2050 this ratio is projected 
to rise further to about 1 elderly to every 3 working age people (see 
fig. 1).[Footnote 5] 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. 

Figure 1: U.S. Elderly Dependency Ratio (Population Age 65 and Older 
Relative to Age 15 to 64), 1950-2000 and Projected 2005-2050: 

[See PDF for image] 

Source: United Nations. 

Note: Population Division of the Department of Economic and Social 
Affairs of the United Nations Secretariat, World Population Prospects: 
The 2004 Revision and World Urbanization Prospects: The 2003 Revision. 
Data for 2005 through 2050 are projected. The elderly dependency ratio 
equals the number of people age 65 and older divided the number between 
age 15 and 64, expressed as a percentage. 

[End of figure] 

By causing a large shift in the U.S. population's age structure, some 
have suggested that the baby boom generation may affect stock and other 
asset markets when this cohort retires. This concern stems from 
hypothetical spending and saving patterns over people's lifetimes, 
which economists describe in the "life cycle" model. The model 
hypothesizes that people attempt to smooth their consumption over their 
lifetime. As individuals' earnings typically grow over their working 
life, this suggests that younger workers, with relatively low earnings, 
may save relatively little or borrow to finance current consumption (or 
to buy a house); older workers may save significantly more in 
preparation for retirement; and retirees may spend down their savings. 
The model therefore predicts that the saving rate is hump-shaped over 
an individual's lifetime. 

Over the course of their lives, individuals make decisions about not 
only how much to save but also how to distribute their savings among a 
mix of assets, such as stocks, bonds, real estate, and bank accounts. 
For example, older workers are expected to shift their portfolios 
toward less volatile assets, such as bonds or cash accounts, because 
they will tend to prefer assets with a more predictable flow of income 
since they will have less time to weather potential price declines in 
riskier assets such as stocks. 

In addition to their saving and consumption patterns, baby boomers also 
may affect stock returns in particular through broader macroeconomic 
channels. Stocks represent claims on the profits earned by firms, and 
in the long run the returns on these assets should reflect the 
productivity of the firms' capital. Generally, economic theory states 
that capital becomes more productive with more and better quality labor 
to use that capital. Because the baby boom retirement is expected to 
reduce the growth rate of the U.S. labor supply, it may reduce returns 
to capital, which could reduce the returns to stocks. More generally, 
investors may price stocks in relation to the underlying value of the 
firm, taking into account the value of firm's current assets and stream 
of future profits. 

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. Our analysis of the 2004 SCF 
shows that just 10 percent of boomers own more than two-thirds of this 
generation's financial assets, excluding assets held indirectly in DB 
pensions. These wealthiest boomers may be able to support themselves on 
the income from these investments without spending them down 
significantly. About one-third of all boomers do not own any stocks, 
bonds, mutual funds, or retirement accounts.[Footnote 6] As with the 
prior generation, baby boomers may continue to accumulate financial 
assets in retirement and liquidate their assets only gradually with the 
hope of leaving bequests. The gradual entry of the boomers over a 19- 
year period into retirement should further reduce the likelihood of a 
sudden decline in asset prices.[Footnote 7] Further, boomers have 
indicated that they plan to retire later than generations that retired 
in the recent past, with almost half not planning to leave full-time 
employment until age 65 or later. Many may also continue to work 
throughout retirement, reducing or delaying their need to sell 
financial assets. Housing represents a greater share of total wealth 
for most baby boomers than do financial assets, and therefore the 
housing markets present more financial risk to most boomers than the 
financial markets. 

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. According to our analysis of the 2004 
SCF, the wealthiest 10 percent of boomers owned over two-thirds of the 
approximately $7.6 trillion held by boomers in stocks, bonds, mutual 
funds, Individual Retirement Accounts (IRAs), and other account-type 
retirement savings plans in 2004. This wealthiest group held $1.2 
million, on average, in these financial assets, plus over $2 million in 
other assets such as home equity and other investments.[Footnote 8] 
Figure 2 shows the concentration of financial assets among boomers. 
This concentration of wealth is very similar to that of current 
retirees and could mitigate a sharp and sudden impact on financial 
asset prices if wealthy boomers need not spend down their financial 
assets in retirement. Research on current retirees indicates that the 
wealthiest of these individuals tend to not sell their financial 
assets, contrary to what the life-cycle model would predict; 
instead, they choose to live from the income these assets 
generate.[Footnote 9] Our analysis of the 2004 SCF also found that of 
the wealthiest 10 percent of current retirees born before 1946, less 
than 16 percent spent money from their savings and investments over and 
above their income during the previous year. In this same group, over 
65 percent responded that their income in 2003 exceeded their spending, 
indicating that they had accumulated more assets without having a net 
sale from their holdings. 

Figure 2: Distribution of Baby Boomer Financial Assets, by Wealth 
Percentiles: 

[See PDF for image] 

Source: GAO analysis of 2004 Survey of Consumer Finances. 

Note: Financial assets include stocks, bonds, mutual funds, IRAs, Keogh 
plans, and other account-type retirement savings plans. The 
distribution of baby boomers is based on total wealth, defined as the 
net of all assets that each household owns and all outstanding debts. 

[End of figure] 

The possibility of an asset meltdown is further reduced by the fact 
that those households that would seem more likely to need to sell their 
financial assets in retirement do not collectively own a large portion 
of the total stocks and bonds in the market. Although the majority of 
baby boomers hold some financial assets in a variety of investment 
accounts, the total holdings for all boomer households, $7.6 trillion, 
account for roughly one-third of the value of all stocks and 11 percent 
of bonds outstanding in the U.S. markets, and the wealthiest boomers 
own most of these assets (see figs. 3 and 4).[Footnote 10] Those 
households that are most likely to spend down their assets in 
retirement--those not in the top 10 percent by wealth--collectively 
hold just 32 percent of all baby boomer financial assets. As a group, 
the influence of these households on the market is less substantial. 
One-third of this group does not own any stocks, bonds, mutual funds, 
or retirement accounts, and among those who do, their total holdings 
are relatively small, with their median holdings totaling $45,900. 

Figure 3: Percentage of Baby Boomers Who Own Financial Assets and Their 
Use of Different Investment Accounts: 

[See PDF for image] 

Source: GAO analysis of 2004 Survey of Consumer Finances. 

[End of figure] 

Figure 4: Total Financial Assets Held by Boomers and the Rest of the 
U.S. Population: 

[See PDF for image] 

Source: GAO analysis of 2004 SCF. 

Note: Due to rounding, total does not equal 100 percent. 

[End of figure] 

Analysis of Current Retiree Behavior Reveals a Pattern of Continued 
Accumulation and Slow Spending of Assets: 

Our analysis of national data on the investment behavior of current 
retirees reveals an overall slow spending down of assets in retirement, 
with many retirees continuing to purchase stocks. To the extent that 
baby boomers behave like current retirees, a rapid and mass sell off of 
financial assets seems unlikely.[Footnote 11] In examining retiree 
holdings in stocks, using biennial data spanning 1994 to 2004 from HRS, 
we found that many people continue to buy stocks in retirement. More 
than half of retirees own stocks outside of an IRA, Keogh, or pension 
account and, among this group, approximately 57 percent purchased 
stocks at some point over the 10-year period in retirement.[Footnote 
12] We found that from 2002 to 2004 the stock ownership for most of 
these retirees either increased or remained at the same level. Among 
those who owned stock, almost 31 percent reported buying stocks during 
this 2-year period, while just fewer than 26 percent reported 
selling.[Footnote 13] For the retirees who both bought and sold stocks, 
approximately 77 percent purchased at least as much value in stock as 
they sold.[Footnote 14] 

Additionally, although retirees might be expected to have a low 
tolerance for market risk and will therefore divest themselves of 
equities in favor of bonds, the SCF data does not suggest such a major 
reallocation.[Footnote 15] Comparing households' holdings in stocks and 
bonds by age, we found only a small difference in aggregate stock and 
bond allocation across portfolios. Specifically, data from the 2004 SCF 
shows that of total wealth among households headed by people over age 
70, more is invested in stocks than bonds.[Footnote 16] In 2004, 
households headed by those over age 70 had roughly 60 percent of their 
investments in stocks and 40 percent invested in bonds, while those 
households headed by someone aged 40 to 48 held 68 percent of their 
portfolios in stocks and 32 percent in bonds. 

Our finding that retirees slowly spend down assets is consistent with 
the results of several academic studies. One recent study that examined 
asset holdings of elderly households suggests there is a limited 
decline in financial assets as households age.[Footnote 17] Prior work 
also finds evidence that retirees spend down at rates that would leave 
a considerable portion of their wealth remaining at the end of average 
life expectancy and a significant number of retirees continue to 
accumulate wealth at old ages.[Footnote 18] For example, a 1990 study 
estimated that most single women would have approximately 44 percent of 
their initial wealth (at age 65) remaining if they died at the average 
age of life expectancy.[Footnote 19] Other studies have shown that over 
the last several decades the elderly have drawn down their lump-sum 
wealth at relatively conservative rates of 1 to 5 percent per 
year.[Footnote 20] 

Retirees may spend down assets cautiously as a hedge against longevity 
risk. Private annuities, which minimize longevity risk, are not widely 
held by older Americans.[Footnote 21] As life expectancy increases and 
people spend more years in retirement, retirees will need their assets 
to last a longer period of time and, thus, should spend them down more 
slowly. The average number of years that men who reach age 65 are 
expected to live has increased from 13 in 1970 to 16 in 2005, and is 
projected to increase to 17 by 2020. Women have experienced a similar 
rise--from 17 years in 1970 to over 19 years in 2005. By 2020, women 
who reach age 65 will be expected to live another 20 years.[Footnote 
22] 

Another factor that may explain the observed slow spending down of 
assets among retirees is the bequest motive. National survey data show 
that many retirees intend to leave a sizeable bequest, which may 
explain their reluctance to spend down their wealth. Because more than 
three-quarters of retirees have a bequest motive, many may never sell 
all of their assets. To the extent that retirees bequeath their assets 
instead of selling them for consumption, the result could be an 
intergenerational transfer rather than a mass sell-off that would 
negatively affect asset markets. In addition to current retirees, data 
from the HRS indicates that the majority of older baby boomers (those 
born between 1946 and 1955) expect to leave a bequest. Approximately 84 
percent of these baby boomers expect to leave a bequest, while 49 
percent expect the bequest to be at least $100,000. 

It is important to note that the baby boom generation's asset sale 
behavior in retirement might differ from that of recent generations of 
retirees. First, fewer baby boomers are covered by DB plans that 
typically pay a regular income in retirement and increasingly have DC 
plans that build up benefits as an account balance. 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.[Footnote 23] Second, unanticipated expenses, such as long- 
term care and other health care costs, may make actual bequests smaller 
than expected. Although 2002 HRS data indicates that only 8 percent of 
the leading edge of baby boomers have long-term care insurance, recent 
projections show that 35 percent of people currently age 65 will use 
nursing home care.[Footnote 24] If boomers are confronted with higher 
than expected health care costs in retirement, they would have a 
greater need to spend down their assets. 

Defined Benefit Pension Plans Unlikely to Sell Off Large Amounts of 
Stocks Solely as a Response to Boomer Retirement: 

Households are not the only holders of financial assets that might 
shift or draw down their holdings as the baby boomers age. DB pension 
plans, which promise to provide a benefit that is generally based on an 
employee's salary and years of service, hold assets to pay current and 
future benefits promised to plan participants, which are either current 
employees or separated or retired former employees. According to 
Federal Reserve Flow of Funds Accounts data, private-sector plans as a 
whole owned $1.8 trillion in assets in 2005. Of this amount, plans held 
approximately half in stocks.[Footnote 25] According to the Employee 
Benefit Research Institute (EBRI), federal government DB plans 
contained an additional $815 billion in assets as of 2004. However, 
most of these DB plans invest in special Treasury securities that are 
non-marketable. State and local plans held an additional $2.6 trillion 
in assets; however, the data do not separate DB and DC assets for these 
plans. If DB plans hold approximately 85 percent of state and local 
plan assets, as is the case for federal government plans, and if DB 
plans held approximately half of their assets as equities, this would 
mean state and local plans held an estimated $1.1 trillion in equities. 
Thus, public and private DB plans held an estimated approximate value 
of $2 trillion in stocks. Because of the number of boomers, we would 
expect that, as they retire, DB plans would pay out an increasing 
amount of benefits. This demographic shift could cause plans to sell 
some of their holdings to provide current benefits. Indeed, a 1994 
study projected that the pension system would cease to be a source of 
saving for the economy roughly in 2024.[Footnote 26] We would also 
expect plans to convert some stocks to less volatile assets, such as 
cash and bonds, to better ensure that plans have sufficient money to 
pay current benefits.[Footnote 27] 

While DB plans may shift their assets in response to demographic 
changes, it is unclear whether they would cause major variations in 
stock and bond prices. First, even though DB plans hold about $2 
trillion in stocks, this sum still represents a relatively small 
fraction of total U.S. stock wealth ($16.1 trillion, as of 2004). 
Further, there are reasons why DB plans may not appreciably shift their 
investments away from stocks. While the baby boom retirement may 
increase the number of persons receiving benefits, the DB participant 
pool has been aging long before the baby boom approached retirement. 
The percentage of private-sector DB participants made up of retirees 
has climbed steadily for the past 2 decades, from 16 percent in 1980 to 
over 25 percent in 2002. Over this time, we have observed little 
evidence of a shift in investments by private DB plans away from stocks 
and toward fixed-income assets. In 1993, private DB plans held just 
below half of their assets in stocks, about the same proportion as 
today; in 1999, at the recent stock market's peak, plans held about 58 
percent of assets in stocks. 

Gradual Entry into Retirement and Subsequent Employment Plans Suggest a 
Cumulative Rather Than Sudden Effect on Markets: 

The gradual transition of the baby boomers into retirement suggests 
that the sale of their financial assets will be spread out over a long 
period of time, which mitigates the risk of a shock to financial 
markets. The baby boom generation spans a 19-year time period--the 
oldest baby boomers will turn age 62 in 2008, becoming eligible for 
Social Security benefits, but the youngest baby boomers will not reach 
age 62 until 2026. Among boomers in the U.S. population in 2004, the 
peak birth year was 1960, as seen in figure 5, and these boomers will 
turn age 62 in 2022. 

Figure 5: 2004 U.S. Resident Population, by Birth Year: 

[See PDF for image] 

Source: 2006 Statistical Abstract of the United States, 

[End of figure] 

As boomers gradually enter retirement, the share of the population age 
65 and older is projected to continue increasing until about 2040, at 
which point it is expected to plateau, as seen in figure 6. Thus, the 
aging of the baby boom generation, in conjunction with the aging of the 
overall U.S. population, is a cumulative development rather than a 
sudden change. 

Figure 6: Share of the U.S. Population Age 65 and Older, Projected to 
2050: 

[See PDF for image] 

Source: U.S. Census Bureau. 

[End of figure] 

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. An increase in employment at older 
ages could facilitate the accumulation of financial assets over a 
longer period of time than was typical for earlier generations (albeit 
also needing to cover consumption over a longer life 
expectancy).[Footnote 28] Furthermore, continuing to work for pay in 
retirement, often called partial or phased retirement, would reduce the 
need to sell assets to provide income.[Footnote 29] In fact, some 
degree of extended employment has already been evident since the late 
1990s, as seen in figure 7. From 1998 to 2005, the labor force 
participation rate of men and women age 65 and older increased by 20 
percent and 34 percent, respectively. Survey data show that such a 
trend is expected to continue: Data from the 2004 SCF indicate that the 
majority of boomers intend to work past age 62, with boomers most 
commonly reporting they expect to work full time until age 65. Almost 
32 percent of boomers said they never intend to stop working for pay. 
Another study by the AARP in 2004 found that many baby boomers expect 
to go back to work after they formally retire--approximately 79 percent 
of boomers said they intend to work for pay in retirement.[Footnote 30] 
Other research has shown that about one-third of those who return to 
work from retirement do so out of financial necessity.[Footnote 31] 
These developments suggest that baby boomers may be less inclined to 
take retirement at age 62. However, some boomers may not be able to 
work as long as they expect because of health problems or limited 
employment opportunities.[Footnote 32] To the extent that these boomers 
follow through on their expressed plans to continue paid work, their 
income from earnings would offset some of their need to spend down 
assets. 

Figure 7: Labor Force Participation Rates for Americans, Ages 55 and 
Older: 

[See PDF for image] 

Source: U.S. Bureai of Labor Statistics. 

[End of figure] 

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. For a majority of 
boomers, the primary residence accounts for their largest source of 
wealth--outstripping DC pensions, personal savings, vehicles, and other 
nonfinancial assets. Home ownership rates among boomers exceed 75 
percent, and recent years of appreciation in many housing markets have 
increased the net wealth of many boomers. This suggests that a price 
decline in housing, a prospect that many analysts appear to be 
concerned about, could have a much greater impact on the overall wealth 
of boomers than a financial market meltdown. While research has 
suggested that baby boomers have influenced housing demand and, in 
turn, prices, assessing the potential impact of the baby boom 
retirement on the housing market is beyond the scope of our work. 

Interestingly, according to experts we interviewed, equity in the 
primary residence has not historically been viewed by retirees as a 
source of consumable wealth, except in the case of financial 
emergencies. Reverse mortgages, which do not require repayment until 
the owner moves from the residence or dies, could grow more attractive 
for financing portions of retirement spending, particularly for those 
baby boomers who are "house rich but cash poor" and have few other 
assets or sources of income.[Footnote 33] For boomers who do own 
financial assets, an expansion of the reverse mortgage market might 
reduce their need to sell financial assets rapidly. However, boomers 
also appear to be carrying more debt than did previous generations. Our 
analysis of the SCF data shows that the mean debt-to-asset ratio for 
people aged 52 to 58 rose from 24.5 percent in 1992 to 70.9 percent in 
2004.[Footnote 34] To the extent that baby boomers continue to be 
willing to carry debt into retirement, they may require more income in 
retirement to make payments on this debt. 

Researchers and Financial Industry Representatives Largely Foresee 
Little to No Impact on Financial Markets as the Baby Boomers Retire: 

Researchers and financial industry representatives largely expect the 
U.S. baby boom's retirement to have little or no impact on the stock 
and bond markets. A wide range of studies, both simulation-based and 
empirical, either predicted a small, negative impact or found little to 
no association between the population's age structure and the 
performance of 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. Broadly 
consistent with the literature and views of financial industry 
representatives, our statistical analysis indicates that past changes 
in macroeconomic and financial factors have explained more of the 
variation in historical stock returns than demographic changes. 
Variables such as industrial production and dividends explained close 
to half of the variation in stock returns, but changes in the 
population's age structure explained on average less than 6 percent. If 
the pattern holds, our findings indicate that such factors could 
outweigh any future demographic effect on stock returns. 

Academic Studies Largely Foresee Little to No Baby Boom Retirement 
Effect on the Financial Markets: 

With few exceptions, the academic studies we reviewed indicated that 
the retirement of U.S. baby boomers will have little to no effect on 
the financial markets. Studies that used models to simulate the market 
effects of a baby boom followed by a decline in the birth rate 
generally showed a small, negative effect on financial asset returns. 
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.[Footnote 35] 

Simulation-Based Studies: 

Thirteen studies that we reviewed used models of the economy to 
simulate how a hypothetical baby boom followed by a baby bust would 
affect financial asset returns.[Footnote 36] The simulation models 
generally found that such demographic shifts can affect returns through 
changes in the saving, investment, and workforce decisions made by the 
different generations over their lifetime. For example, baby boomers 
cause changes in the labor supply and aggregate saving as they progress 
through life, influencing the demand for assets and productivity of 
capital and, thus, the rates of return. Specifically, the models 
predicted that baby boomers cause financial asset returns to increase 
as they enter the labor force and save for retirement and then cause 
returns to decline as they enter retirement and spend their savings. 
According to a recent study surveying the literature, such simulation 
models suggest, on the whole, that U.S. baby boomers can expect to earn 
on their financial assets around half a percentage point less each year 
over their lifetime than the generation would have earned absent a baby 
boom.[Footnote 37] In effect, for two investors--one of whom earns 7 
percent and the other earns 6.5 percent annually over a 30-year period-
-the former investor would earn $6.61 for every dollar saved at the 
beginning of the period and latter investor would earn $5.61 for every 
dollar saved.[Footnote 38] 

None of the simulation-based studies concluded that the U.S. baby boom 
retirement will precipitate a sudden and sharp decline in asset prices, 
and some studies presented their results in quantitative terms. One of 
the studies, for example, predicted that the baby boom's retirement 
would at worst lower stock prices below what they would otherwise be by 
roughly 16 percent over a 20-year period starting around 2012.[Footnote 
39] This decline, however, is equivalent to around 0.87 percent each 
year--somewhat small in comparison to real annual U.S. stock returns, 
which have averaged about 8.7 percent annually since 1948. The study 
therefore concluded that the size of the decline is much too small to 
justify the term "meltdown." Moreover, another study predicted that 
baby boomers can expect the returns on their retirement savings to be 
about 1 percentage point below their current annual returns.[Footnote 
40] The study's lower returns reflect the decline in the productivity 
of capital that results from fewer workers being available (due to the 
baby boom retirement) to put the capital to productive use. A third 
study's results suggest that fluctuations in the size of the different 
generations induce substantial changes in equity prices, but the study 
does not conclude that the baby boom's retirement will lead to a sharp 
and sudden decline in asset prices.[Footnote 41] 

The simulation models we reviewed, by design, excluded or simplified 
some factors that were difficult to quantify or involved uncertainty 
that may cause the models to overstate the baby boom's impact on the 
markets. For example, some models assumed that baby boomers will sell 
their assets solely to a relatively smaller generation of U.S. 
investors when they retire. Some researchers have noted that if China 
and India were to continue their rapid economic growth, they may spur 
demand for the assets that baby boomers will sell in 
retirement.[Footnote 42] Supporting this view, other research suggests 
that global factors may be more important than domestic factors in 
explaining stock returns in developed countries.[Footnote 43] Some 
models assumed that individuals in the same generation enter the labor 
force at the same time, work a fixed amount, and retire at the same 
time. In reality, some may work full or part-time after reaching 
retirement age.[Footnote 44] Likewise, the baby boomers' children, 
rather than working a fixed amount, may delay their entry into the 
labor force and take advantage of job opportunities created by retiring 
baby boomers. These factors could dampen the effect of the baby boomer 
retirement on the markets.[Footnote 45] A few of the models neglect 
that some investors may be forward-looking and anticipate the potential 
effect of the aging baby boomers on the markets. To the extent that 
such investors do so, current financial asset prices would reflect, at 
least partially, the future effect of the baby boom's retirement and 
thus dampen the event's effect on asset prices when it actually 
occurs.[Footnote 46] Finally, the models typically do not include a 
significant increase in immigration, but such an outcome would increase 
the labor force and be expected to raise the productivity of capital 
and, thus, the return on financial assets.[Footnote 47] 

Empirical Studies: 

Seven empirical studies of the U.S. financial markets we reviewed 
suggested, on average, that the retirement of U.S. baby boomers will 
have a minimal, if any, impact on financial asset returns.[Footnote 48] 
These studies specifically tested whether changes in the U.S. 
population's age structure have affected stock returns or bond yields 
or both over different periods, ranging from 1910 to 2003. These 
studies focused primarily on changes in the size of the U.S. middle age 
population (roughly age 40 to 64) or its proportion to other age 
segments of the population. People in this age group are presumably in 
their peak earning and saving years and, thus, expected to have the 
most significant impact on financial asset returns. 

These empirical studies are inherently retrospective. Therefore, care 
must be taken in drawing conclusions about a future relationship 
between demographics and asset performance, especially given that the 
historical data do not feature an increase in the retired population of 
the magnitude that will occur when the U.S. baby boomers retire. 
However, the significant shift in the structure of the population that 
occurred as the boomers entered the labor force and later their peak 
earning years should provide an indication of how demographic change 
influences financial asset returns. 

For stocks, four of the seven studies found statistical evidence 
implying that the past increases in the relative size of the U.S. 
middle age population have increased stock returns.[Footnote 49] This 
finding supports the simulation-model predictions that a relative 
decrease in the middle age population--as is expected to occur when 
baby boomers begin to retire--will lower stock returns. In contrast, 
two of the studies found little evidence that past changes in the U.S. 
middle age population have had any measurable effect on stock 
returns.[Footnote 50] Finally, the remaining study found evidence 
implying that a relative decrease in the U.S. middle age population in 
the future would increase, rather than decrease, stock 
returns.[Footnote 51] 

For the four studies whose statistical results implied that the baby 
boom retirement will cause stock returns to decline, we determined that 
the magnitude of their demographic effect, on balance, was relatively 
small. Using U.S. Census Bureau data, we extrapolated from three of the 
four studies' results to estimate the average annual change in returns 
of the Standard and Poor's (S&P) 500 Index that the studies would have 
attributed to demographic changes from 1986 to 2004. During this 
period, baby boomers first began to turn age 40 and the proportion of 
individuals age 40 to 64 went from about 24.5 percent of the population 
to about 32 percent.[Footnote 52] We found two of the studies' results 
show that the increase in the middle age population from 1986 to 2004 
led stock returns, on average, to increase by 0.19 and 0.10 percentage 
points each year, respectively. We found that the third study's results 
showed a much larger average annual increase of about 6.7 percentage 
points from 1986 to 2004. To put these three estimates into context, 
the average annual real return of the S&P 500 Index during this period 
was around 10 percent. The last estimate, however, may exaggerate the 
probable impact of the baby boom retirement on stock returns.[Footnote 
53] The fourth study's methodology did not allow us to use U.S. census 
data to estimate the effect of its results on stock returns from 1986 
to 2004. Nonetheless, the study estimated that demographically driven 
changes in the demand for stocks can account for about 77 percent of 
the annual increase in real stock prices between 1986 and 1997 and 
predicted that stock prices will begin to fall around 2015 as a result 
of falling demographic demand. 

Besides testing for the effect of demographic shifts on stock returns, 
five of the seven studies included bonds in their analyses and largely 
found that the baby boom retirement will have a small effect or no 
effect on bond yields. Three studies found statistical evidence 
indicating that the past increase in the relative size of the U.S. 
middle age population reduced long-term bond yields. In turn, the 
finding suggests that the projected decrease in the middle age 
population in the future would raise yields. Extrapolating the results 
of one study, we find its estimates imply that the increase in the U.S. 
middle age population from 1986 to 2004 reduced long-term bond yields 
by about 0.42 percentage points each year, compared to actual real 
yields that averaged 3.41 percent over the same time period. The other 
two studies tested how the demographic shift affected long-term bond 
prices rather than yields, but an increase in prices would, in effect, 
reduce yields.[Footnote 54] We found that the results of one of the 
studies showed that the demographic shift from 1986 to 2004 raised bond 
prices by only about 0.05 percentage points each year. The other 
study's methodology did not allow us to estimate the effect, but the 
study estimated that demographically driven changes in the demand for 
bonds can account for at least 81 percent of the annual increase in 
real bond prices between 1986 and 1997 and predicted that bond prices 
will begin to fall around 2015 as a result of falling demographic 
demand. In contrast to these studies, two studies found little 
statistical evidence to indicate that past changes in the middle age 
population have had any measurable effect on long-term bond 
returns.[Footnote 55] 

Financial Industry Representatives Do Not Expect Baby Boom Retirement 
to Have a Significant Financial Market Impact: 

The financial industry representatives with whom we met generally told 
us that they do not expect U.S. baby boomers to have a significant 
impact on the financial markets when they retire. They cited a number 
of factors that could mitigate a baby boom induced market decline, many 
of which we discussed earlier.[Footnote 56] For example, some mentioned 
the concentration of assets among a minority of households, the long 
time span over which boomers will be retiring, and the possibility for 
many boomers to continue working past traditional retirement ages. Some 
also noted that baby boomers will continue to need to hold stocks well 
into retirement to hedge inflation and to earn a higher rate of return 
to hedge the risk of outliving their savings, reducing the likelihood 
of a sharp sell-off of stock. A number of representatives cited 
developments that could increase the demand for U.S. assets in the 
future, such as the continued economic growth of developing countries 
and an increase in immigration. Finally, several commented that 
interest rates, business cycles, and other factors that have played the 
primary role in influencing financial asset returns are likely to 
overwhelm any future demographic effect from changes in the labor force 
or life cycle savings behavior. 

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. In addition, factors not 
captured by our model were also larger sources of stock return 
variation than the demographic variables we selected. We undertook our 
own statistical analysis, because many of the empirical studies we 
reviewed either did not include relevant variables that influence stock 
returns in their models or included them but did not discuss the 
importance of these variables relative to the demographic 
variables.[Footnote 57] To broaden the analysis, we developed a 
statistical model of stock returns based on the S&P 500 Index to 
compare the effects of changes in demographic, macroeconomic, and 
financial variables on returns from 1948 to 2004.[Footnote 58] As shown 
in figure 8, fluctuations in the macroeconomic and financial variables 
that we selected collectively explain about 47 percent of the variation 
in stock returns over the period. These variables are the growth rate 
of industrial production,[Footnote 59] the dividend yield, the 
difference between interest rates on long-and short-term bonds, and the 
difference between interest rates on risky and safe corporate bonds-- 
all found in previous studies to be significant determinants of stock 
returns. These variables are likely to contain information about 
current or future corporate profits. In contrast, our four demographic 
variables explained only between 1 percent and 8 percent of the 
variation in the annual stock returns over the period. These variables 
were based on population measures found to be statistically significant 
in the empirical studies we reviewed: the proportion of the U.S. 
population age 40 to 64, the ratio of the population age 40 to 49 to 
the population age 20 to 29, and annual changes in the two. Note, 
however, that almost half of the variation in stock returns was 
explained by neither the macroeconomic and financial variables nor the 
demographic factors we tested, a finding that is comparable to similar 
studies. Hence, some determinants of stock returns remain unknown or 
difficult to quantify. 

Figure 8: Sources of Stock Market Return Variation: 

[See PDF for image] 

Source: GAO analysis of S&O 500 returns, 1948-2004. 

[End of figure] 

The statistical model shows that financial markets are subject to a 
considerable amount of uncertainty and are affected by a multitude of 
known and unknown factors. However, of those known factors, the 
majority of the explanatory power stems from developments other than 
domestic demographic change. Simply put, demographic variables do not 
vary enough from year to year to explain the stock market ups and downs 
seen in the data. This makes it unlikely that demographic changes, 
alone, could induce a sudden and sharp change in stock prices, but 
leaves open the possibility for such changes to lead to a sustained 
reduction in returns. At the same time, fluctuations in dividends and 
industrial production, which are much more variable than demographic 
changes, may obscure any demographic effect in future stock market 
performance. For example, a large recession or a significant reduction 
in dividends would have a negative effect on annual returns that would 
likely overwhelm any reduction in returns resulting from the baby boom 
retirement. Conversely, an unanticipated increase in productivity or 
economic growth would be expected to increase returns substantially and 
likely dwarf the effect of year-over-year changes in the relative size 
of the retired population. 

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. This reflects the decline of coverage by traditional DB 
pension plans, which typically pay a regular income throughout 
retirement, and the rise of account-based DC plans. Uncertainties about 
the future level of Social Security benefits, including the possible 
replacement of some defined benefits by private accounts, and the 
projected increases in medical and long-term care costs add to the 
trend toward individuals taking on more responsibility and risk for 
their retirement. All of these developments magnify the importance of 
achieving rates of return on savings high enough to produce sufficient 
income for a secure retirement. In this environment, individuals will 
need to become more educated about financial issues, both in 
accumulating sufficient assets as well as learning to draw them down 
effectively during a potentially long retirement. 

As Baby Boomers Retire, Fewer May Receive Income from Traditional 
Pensions: 

Changes in pension design will require many baby boomers and others to 
take greater responsibility in providing for their retirement income, 
increasing the importance of rates of return for them. The past few 
decades have witnessed a dramatic shift from DB plans to DC plans. From 
1985 to 2004, the number of private sector DB plans has shrunk from 
about 114,000 to 31,000. From 1985 to 2002 (the latest year for which 
complete data are available), the number of DC plans almost doubled, 
increasing from 346,000 to 686,000. Furthermore, the percentage of full-
time employees participating in a DB plan (at medium and large firms) 
declined from 80 to 33 percent from 1985 to 2003, while DC coverage 
increased from 41 to 51 percent over the period.[Footnote 60] The shift 
in pension design has affected many boomers. According to the 2004 SCF, 
about 50 percent of people older than the baby boomers reported 
receiving benefits from a DB plan, but fewer than 44 percent of baby 
boomers have such coverage. However, within the baby boom generation, 
there is a noticeable difference: 46 percent of older boomers (born 
between 1946 and 1955) reported having a DB plan, while only 39 percent 
of young boomers (born between 1956 and 1964) had a DB plan (see table 
1).[Footnote 61] According to the SCF, the percentage of households age 
35 to 44 with a DC plan increased from 18 percent in 1992 to 42 percent 
in 2001. 

Table 1: Pension Coverage by Plan Design, 2004, as Percentage of Birth 
Cohort: 

Birth years: 1956-1964; 
DB plan only: 16.8; 
DC plan only: 21.6; 
Both DB and DC: 22.1. 

Birth years: 1946-1955; 
DB plan only: 23.5; 
DC plan only: 18.6; 
Both DB and DC: 22.2. 

Birth years: 1936-1945; 
DB plan only: 34.1; 
DC plan only: 10.7; 
Both DB and DC: 16.5. 

[End of table] 

Source: GAO Analysis of 2004 SCF. 

The shift from DB to DC plans places greater financial management 
responsibility on a growing number of baby boomers and makes their 
retirement savings more dependent on financial market performance. 
Unlike DB plans, DC plans do not promise a specified benefit for life. 
Rather, DC plan benefits depend on the amount of contributions, if any, 
made to the DC plan by the employee and the employer, and the returns 
earned on assets held in the plan. Because there is no guaranteed 
benefit, the responsibility to manage these assets and the risk of 
having insufficient pension benefits at retirement falls on the 
individual. Similar to DB plans, some DC plans offer their participants 
the option of converting their balance into an annuity upon retirement, 
but DC plan participants typically take or keep their benefits in lump- 
sum format.[Footnote 62] 

Small changes in average rates of return can affect the amount 
accumulated by retirement and income generated during retirement. For 
example, if a boomer saved $500 each year from 1964 until retirement in 
2008 and earned 8 percent each year, he or she would accumulate almost 
$209,000 at retirement. The same worker earning 7 percent each year 
over the same period would accumulate only $153,000 at retirement, a 
difference in total saving of 27 percent. Moreover, rates of return can 
have a similar affect on retirement income. With $209,000 at 
retirement, the retiree could spend $19,683 each year for 20 years if 
he or she continued to earn 8 percent each year in retirement. If the 
annual rate of return dropped one percentage point to 7 percent, the 
same amount of retirement savings would generate only about $18,412 
each year for 20 years, a difference of 6.5 percent in annual 
retirement income. Retirees depending on converting savings to income 
are particularly dependent on rates of return, since they may have 
limited employment options. Similarly, workers nearing retirement may 
be more affected by fluctuations in rates of return than younger 
workers, who would have more working years to make up any declines or 
losses. 

Although DC plans place greater responsibility on individuals for their 
retirement security, statistics indicate that so far at least some have 
yet to fully accept it. First, many workers who are covered by a DC 
plan do not participate in the plan. Recent data indicate that only 
about 78 percent of workers covered by a DC plan actually participate 
in the plan. Second, even among baby boom participants, many have not 
saved much in these accounts. Figure 9 shows the percentage of boomers 
with account balances in their DC pensions and IRAs, which are personal 
accounts where individuals can accumulate retirement savings. Over one- 
half of households headed by someone born from 1946 to 1955 did not 
have a DC pension; for those that did have a DC pension, their median 
balance was $58,490, an amount that would generate just a $438 monthly 
annuity starting at age 65. Similarly, only 38 percent reported having 
an IRA, and the median IRA balance among those participating was only 
$37,000, an amount that would generate a monthly annuity of only 
$277.[Footnote 63] 

Figure 9: Individual Retirement Account and Defined Contribution 
Pension Balances for Older and Younger Baby Boomers, 2003: 

[See PDF for image] 

Source: GAO analysis of 2004 Survey of Consumer Finances. 

[End of figure] 

These statistics may not provide a complete picture for some 
individuals and households, since those with a small DC plan account 
balance also may have a DB plan and thus may not have the same need to 
contribute to their account. However, EBRI found that, as of 2004, 
median savings in 401(k) accounts, a type of DC plan, were higher for 
every age group up to age 64 for those with a DB plan than those with 
only a 401(k). Also, the median balances for those with only 401(k) 
plans may not be enough to support them in retirement. For families 
with the head of family age 55 to 64 in 2004 with only a 401(k), EBRI 
estimated that their median balance was $50,000; 
for those age 45 to 54, the median was $40,000. While many in these age 
groups could continue to work for several years before reaching 
retirement age, without substantially higher savings, these households 
may be primarily dependent on income from Social Security during 
retirement. 

Extending our analysis of the allocation of baby boomer assets 
generally reveals that financial assets are, in general, a small 
portion of boomers' asset portfolios. Among all boomers, housing is the 
largest asset for the majority of households, with vehicles making up 
the second largest portion of wealth. Figure 10 shows the allocation of 
baby boomer assets among housing, cash, savings, pensions, vehicles, 
and other assets.[Footnote 64] Not including the top quartile by 
wealth, savings and pensions, the portions of wealth that are invested 
in stocks and bonds are a small portion of overall wealth, constituting 
no more than 20 percent of total gross assets per household. Among the 
bottom two quartiles by wealth, on average boomers have more of their 
wealth invested in their personal vehicle (automobile or truck), which 
depreciates over time, than in either savings or pensions, assets that 
generally appreciate over time. Overall, the finding that most boomers 
do not hold a significant amount of financial assets, measured both by 
account balance and by percentage of total assets, mitigates this 
generation's potential effect on the asset markets as boomers retire 
and highlights the fact that many boomers may enter retirement without 
adequate personal savings. 

Figure 10: Allocation of Assets of Baby Boomers, by Wealth Quartiles: 

[See PDF for image] 

Source: GAO analysis of 2004 Survey of Consumer Finances. 

Note: Q1 refers to the bottom 25 percent of the population by wealth, 
while Q4 refers to the top 25 percent of the population by wealth. 

[End of figure] 

Financial Stress on Social Security, Medicare, and Health Expenditures 
May Create Uncertainties for Some Baby Boomers and Future Generations: 

The uncertainties surrounding the future financial status of Social 
Security, the program which provides the foundation of retirement 
income for most retirees, also presents risks to baby boomers' 
retirement security.[Footnote 65] These benefits are particularly 
valuable because they provide a regular monthly income, adjusted each 
year for inflation, to the recipient and his survivors until death. 
Thus, Social Security benefits provide some insurance against outliving 
one's savings and against inflation eroding the purchasing power of a 
retiree's income and savings. Such benefits provide a unique retirement 
income source for many American households. 

Social Security, however, faces long-term structural financing 
challenges that, if unaddressed, could lead to the exhaustion of its 
trust funds. According to the intermediate assumption projections of 
Social Security's 2006 Board of Trustees' Report, annual Social 
Security payouts will begin to exceed payroll taxes by 2017, and the 
Social Security trust fund is projected to be exhausted in 2040. Under 
these projections, without counterbalancing changes to benefits or 
taxes, tax income would be enough to pay only 74 percent of currently 
scheduled benefits as of 2040, with additional, smaller benefit 
reductions in subsequent years. 

These uncertainties are paralleled, if not more pronounced, with 
Medicare, the primary social insurance program that provides health 
insurance to Americans over age 65. Medicare also faces very large long-
term financial deficits. According to the 2006 Trustees report, the 
Hospital Insurance Trust Fund is projected to exhaust itself by 2018. 
The challenges stem from concurrent demographic trends--people are 
living longer, spending more years in retirement, and have had fewer 
children--and from costs for health care rising faster than growth in 
the gross domestic product. These changes increase benefits paid to 
retirees and reduce the number of people, relative to previous 
generations, available to pay to support these benefits. 

These financial imbalances have important implications for future 
retirees' retirement security. While future changes to either program 
are uncertain, addressing the financial challenges facing Social 
Security and Medicare may require retirees to receive reduced benefits, 
relative to scheduled future benefits, while workers might face higher 
taxes to finance current benefits. In addition, some proposals to 
reform Social Security incorporate a system of individual accounts into 
the current program that would reduce scheduled benefits under the 
current system, perhaps with protections for retirees, older workers, 
and low-wage workers, and make up for those reductions to some degree 
with income from the individual accounts.[Footnote 66] Like DC plans 
generally, these accounts would give the individual not only the 
prospect for higher rates of return but also the risk of loss, placing 
additional responsibility and risk on individuals to provide for their 
own retirement security. Similarly, tax-preferred health savings 
accounts are a type of personal account to allow enrollees to pay for 
certain health-related expenditures. 

The worsening budget deficits that are expected to result if fiscal 
imbalances in Social Security and Medicare are not addressed could have 
important effects on the macroeconomy. By increasing the demand for 
credit, federal deficits tend to raise interest rates, which are 
mitigated to the extent that foreign savings flow into the United 
States to supplement scarce domestic savings. If foreigners do not 
fully finance growing budget deficits, upward pressure on interest 
rates can reduce domestic investment in productive capacity. All else 
equal, these higher borrowing costs could discourage new investment and 
reduce the value of capital already owned by firms, which should be 
reflected in reduced stock prices as well. 

The fiscal challenges facing Medicare underscore the issue of rising 
retiree health costs generally. Rising health care costs have made 
health insurance and anticipated medical expenses increasingly 
important issues for older Americans. Although the long-term decline in 
the percentage of employers offering retiree health coverage has 
appeared to have leveled off in recent years, retirees continue to face 
an increasing share of costs, eligibility restrictions, and benefit 
changes that contribute to an overall erosion in the value and 
availability of coverage. A recent study estimated that the percentage 
of after-tax income spent on health care will almost double for older 
individuals by 2030 and that after taxes and health care spending 
incomes may be no higher in 2030 than in 2000 for a typical older 
married couple. People with lower incomes will be the most adversely 
affected. The study projected that by 2030, those in the bottom 20 
percent of the income distribution would spend more than 50 percent of 
their after-tax income on insurance premiums and out-of-pocket health 
care expenses, an increase of 30 percentage points from 2000.[Footnote 
67] The costs of healthcare in retirement, especially long-term and end-
of-life care, are a large source of uncertainty for baby boomers in 
planning their retirement financing, as typical private and public 
insurance generally does not cover these services. Nursing home and 
long-term care are generally not covered under Medicare but by 
Medicaid, which is the program that provides health insurance for low- 
income Americans. Medicaid eligibility varies from state to state, but 
generally requires that a patient expend most of their financial assets 
before they can be deemed eligible for benefits. Most private long-term 
care insurance policies pay for nursing home and at-home care services, 
but these benefits may be limited, and few elderly actually purchase 
this type of coverage, with a little over 9 million policies purchased 
in the United States by 2002. Thus, health care costs may cause some 
baby boomers without long-term care insurance to rapidly spend 
retirement savings. 

Baby Boomers and Future Generations May Increasingly Rely on Their Own 
Investment Decisions, Highlighting Importance of Financial Literacy: 

With more individuals being asked to take responsibility for saving for 
their own retirement in a DC pension plan or IRA, financial literacy 
and skills are becoming increasingly important in helping to ensure 
that retirees can enjoy a comfortable standard of living. However, 
studies have found that many individuals have low financial 
literacy.[Footnote 68] A recent study of HRS respondents over age 50 
found that only half could answer two simple questions regarding 
compound interest and inflation correctly, and one-third could answer 
these two questions and another on risk diversification correctly. 
Other research by AARP of consumers age 45 and older found that they 
often lacked knowledge of basic financial and investment terms. 
Similarly, a survey of high school students found that they answered 
questions on basic personal finance correctly only about half of the 
time. 

Baby boomers approaching retirement and fortunate enough to have 
savings may still face risks from failing to diversify their stock 
holdings. In one recent survey, participants perceived a lower level of 
risk for their company stock than for domestic, diversified stock 
funds.[Footnote 69] However, investors are more likely to lose their 
principal when investing in a single stock as opposed to a diversified 
portfolio of stocks, because below average performance by one firm may 
be offset by above average performance by the others in the portfolio. 
In addition, holding stock issued by one's employer in a pension 
account is even more risky because if the company has poor financial 
performance, it could result in both the stock losing value and the 
person losing his job. One consequence of this poor financial literacy 
may be investors holding a substantial part of their retirement 
portfolio in employer stock. EBRI reported that the average 401(k) 
investor age 40 to 49 had 15.4 percent of her portfolio in company 
stock in 2004; 
the average investor in his 60's still had 12.6 percent of her assets 
in company stock.[Footnote 70] Perhaps of greater concern, the Vanguard 
Group found that, among plans actively offering company stock, 15 
percent of participants had more than 80 percent of their account 
balance in company stock in 2004.[Footnote 71] 

Concluding Observations: 

Our findings largely suggest that baby boomers' retirement is unlikely 
to have a dramatic impact on financial asset prices. However, there 
appear to be other significant retirement risks facing the baby boom 
and future generations. 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. These trends mean that rates of return 
will play an increasingly important role in individuals' retirement 
security. For those with sufficient income streams, this new 
responsibility for retirement will entail a lifetime of financial 
management decisions--from saving enough to managing such savings to 
generate an adequate stream of income during retirement, the success of 
which will directly or indirectly be dependent on rates of return. 
Given the potential impact of even a modest decline in returns over the 
long run on savings and income, market volatility, and uncertainties 
about pensions, Social Security, and Medicare, the onset of the baby 
boom retirement poses many questions for future retirement security. 

The performance of financial and other asset markets provides just one 
source of risk that will affect the retirement income security of baby 
boomers and ensuing generations. For those with financial assets, 
choices they make about investments play a critical role not just in 
having adequate savings at retirement but also in making sure their 
wealth lasts throughout retirement. That Americans are being asked to 
assume more responsibility for their retirement security highlights the 
importance of financial literacy, including basic financial concepts, 
investment knowledge, retirement age determination, and asset 
management in retirement. Government policy can help, policies that 
encourage individuals to save more and work longer (for those who are 
able) and that promote greater education about investing and retirement 
planning that can help ensure higher and more stable retirement incomes 
in the future. 

Although individual choices about saving and working will continue to 
play a primary role in determining retirement security, the high 
percentage of boomers who have virtually no savings, assets, or 
pensions will face greater difficulties in responding to the new 
retirement challenges. For this group, the federal government will play 
an especially key role in retirement security through its retirement 
and fiscal policies. The challenges facing Social Security and Medicare 
are large and will only grow as our population ages. Legislative 
reforms to place Social Security and Medicare on a path towards 
sustainable long-term solvency would not only reduce uncertainty about 
retiree benefits, particularly for those Americans who own few or no 
assets, but also help address the federal government's long-term budget 
imbalances that could affect the economy and asset markets. Ultimately, 
retirement security depends on how much society and workers are willing 
to set aside for savings and retirement benefits and on the 
distribution of retirement risks and responsibilities among government, 
employers, and individuals. One of Congress's greatest challenges will 
be to balance this distribution in a manner that achieves a national 
consensus and helps Americans keep the promise of adequate retirement 
security alive in the 21st century. 

Agency Comments: 

We provided a draft of this report to the Department of Labor, the 
Department of the Treasury, the Department of Housing and Urban 
Development, and the Social Security Administration, as well as several 
outside reviewers, including one from the Board of Governors of the 
Federal Reserve System. Labor, Treasury, and SSA and the outside 
reviewers provided technical comments, which we incorporated as 
appropriate. We are sending copies of this report to the Secretary of 
Labor, the Secretary of the Treasury, the Secretary of the Housing and 
Urban Development Department, and the Commissioner of the Social 
Security Administration, appropriate congressional committees, and 
other interested parties. We will also make copies available to others 
on request. In addition, the report will be available at no charge on 
GAO's Web site at [Hyperlink, http://www.gao.gov]. 

If you have any questions concerning this report, please contact 
Barbara Bovbjerg at (202) 512-7215 or George Scott at (202) 512-5932. 
Contact points for our Office of Congressional Relations and Public 
Affairs may be found on the last page of this report. GAO staff who 
made contributions are listed in appendix VI. 

Signed by: 

Barbara D. Bovbjerg, Director: 
Education, Workforce, and Income Security Issues: 

Signed by: 

George A. Scott, Acting Director: 
Financial Markets and Community Investment Issues: 

List of Congressional Committees: 

The Honorable Richard C. Shelby: 
Chairman: 
The Honorable Paul S. Sarbanes: 
Ranking Minority Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Charles E. Grassley: 
Chairman: 
The Honorable Max Baucus: 
Ranking Minority Member: 
Committee on Finance: 
United States Senate: 

The Honorable Susan M. Collins: 
Chairman: 
The Honorable Joseph I. Lieberman: 
Ranking Minority Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Gordon H. Smith: 
Chairman: 
The Honorable Herb Kohl: 
Ranking Minority Member: 
Special Committee on Aging: 
United States Senate: 

The Honorable George Miller: 
Ranking Minority Member: 
Committee on Education and the Workforce: 
House of Representatives: 

The Honorable Michael G. Oxley: 
Chairman: 
The Honorable Barney Frank: 
Ranking Minority Member: 
Committee on Financial Services: 
House of Representatives: 

The Honorable Tom Davis: 
Chairman: 
The Honorable Henry A. Waxman: 
Ranking Minority Member: 
Committee on Government Reform: 
House of Representatives: 

The Honorable William M. Thomas: 
Chairman: 
The Honorable Charles B. Rangel: 
Ranking Minority Member: 
Committee on Ways and Means: 
House of Representatives: 

The Honorable Jim McCrery: 
Chairman: 
The Honorable Sander M. Levin: 
Ranking Member: 
Subcommittee on Social Security: 
House Committee on Ways and Means: 

[End of section] 

Appendix I: Scope and Methodology: 

To analyze whether the retirement of the baby boom generation is likely 
to precipitate a dramatic drop in financial asset prices, we relied 
primarily on information from two large survey data sets. We calculated 
the distribution of assets and wealth among baby boomers and existing 
retirees and bequest and work expectations of baby boomers from data 
from various waves of the Federal Reserve's Survey of Consumer Finances 
(SCF). This triennial survey asks extensive questions about household 
income and wealth components; we used the latest available survey from 
2004 and previous surveys back to 1992. The SCF is widely used by the 
research community, is continually vetted by the Federal Reserve, and 
is considered to be a reliable data source. The SCF is believed by many 
to be the best source of publicly available information on U.S. 
household finances. 

Some caveats about the data should be kept in mind. Because some assets 
are held very disproportionately by relatively wealthy families, the 
SCF uses a two part sample design, one of which is used to select a 
sample with disproportionate representation of families more likely to 
be relatively wealthy. The two parts of the sample are adjusted for 
sample nonresponse and combined using weights to provide a 
representation of families overall. In addition, the SCF excludes one 
small set of families by design. People who are listed in the October 
issue of Forbes as being among the 400 wealthiest in the United States 
are excluded. To enable the calculation of statistical hypothesis 
tests, the SCF uses a replication scheme.[Footnote 72] A set of 
replicate samples is selected by applying the key dimensions of the 
original sample stratification to the actual set of completed SCF cases 
and then applying the full weighting algorithm to each of the replicate 
samples. To estimate the variability of an estimate from the SCF, 
independent estimates are made with each replicate and with each of the 
multiple imputations; a simple rule is used to combine the two sources 
of variability into a single estimate of the standard error. 

We also analyzed recent asset sales by retirees and work and bequest 
expectations of baby boomers, as well as gathered further financial 
information on baby boomers and older generations, from data from the 
Health and Retirement Study (HRS) from 1994 to 2004. The University of 
Michigan administers the HRS every 2 years as a panel data set, 
surveying respondents every two years starting in 1992 about health, 
finances, family situation, and many other topics. Like the SCF, the 
HRS is widely used by academics and continually updated and improved by 
administrators. We also received expert opinions on the likely impact 
of the baby boom retirement on asset and housing markets from 
interviews with various financial management companies, public policy 
organizations, and government agencies, particularly those agencies 
dealing with housing. 

To assess the conclusions of academics researchers and outside experts 
on the financial impacts of the baby boom retirement, we read, 
analyzed, and summarized theoretical and empirical academic studies on 
the subject. Based on our selection criteria, we determined that these 
studies were sufficient for our purposes but not that their results 
were necessarily conclusive. We also interviewed financial industry 
representatives from mutual fund companies, pension funds, life 
insurance companies, broker-dealers, and financial industry trade 
associations. We also did our own analysis of the historical importance 
of demographics and other variables on stock returns by collecting 
demographic, financial, and macroeconomic data and running a regression 
analysis. We performed data reliability assessments on all data used in 
this analysis. 

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. We also used facts and findings on pensions and Social 
Security (from past GAO reports and the academic literature) and 
insights from interviews with outside experts to extend and support our 
conclusions. 

We conducted our work between August 2005 and June 2006 in accordance 
with generally accepted government auditing standards. 

[End of section] 

Appendix II: Bibliography of Simulation-Based and Empirical Studies: 

Abel, Andrew B. "Will Bequests Attenuate the Predicted Meltdown in 
Stock Prices When Baby Boomers Retire?" The Review of Economics and 
Statistics, vol. 83, no. 4 (2001): 589-595. 

Abel, Andrew B. "The Effects of a Baby Boom on Stock Prices and Capital 
Accumulation in the Presence of Social Security." Econometrica, vol. 
71, no. 2 (2003): 551-578. 

Ang, Andrew and Angela Maddaloni. "Do Demographic Changes Affect Risk 
Premiums? Evidence from International Data." Journal of Business, vol. 
78, no. 1 (2005): 341-379. 

Bakshi, Gurdip S. and Zhiwu Chen. "Baby Boom, Population Aging, and 
Capital Markets." Journal of Business, vol. 67, no. 2 (1994): 165-202. 

Bergantino, Steven M. "Life Cycle Investment Behavior, Demographics, 
and Asset Prices." Ph.D diss., Massachusetts Institute of Technology, 
1998. 

Börsch-Supan, Axel. "Global Aging: Issues, Answers, More Questions." 
Working Paper WP 2004-084. University of Michigan Retirement Research 
Center (2004). 

Börsch-Supan, Axel, Alexander Ludwig, and Joachim Winter. "Aging, 
Pension Reform, and Capital Flows: A Multi-Country Simulation Model." 
Working Paper No. 04-65. Mannheim Research Institute for the Economics 
of Aging (2004). 

Brooks, Robin J. "Asset Market and Savings Effects of Demographic 
Transitions." Ph.D diss., Yale University, 1998. 

Brooks, Robin. "What Will Happen to Financial Markets When the Baby 
Boomers Retire?" IMF Working Paper WP/00/18, International Monetary 
Fund (2000). 

Brooks, Robin. "Asset-Market Effects of the Baby Boom and Social- 
Security Reform." American Economic Review, vol. 92, no. 2 (2002): 402- 
406. 

Brooks, Robin. "The Equity Premium and the Baby Boom." Working Paper, 
International Monetary Fund, 2003. 

Bütler, Monika, and Philipp Harms. "Old Folks and Spoiled Brats: Why 
the Baby-Boomers' Savings Crisis Need Not Be That Bad." Discussion 
Paper No. 2001-42. CentER, 2001. 

Davis, E. Phillip and Christine Li. "Demographics and Financial Asset 
Prices in the Major Industrial Economies." Working Paper. Brunel 
University, West London: 2003. 

Erb, Claude B., Campbell R. Harvey, and Tadas E. Viskanta. 
"Demographics and International Investments." Financial Analysis 
Journal, vol. 53, no. 4 (1997): 14-28. 

Geanakoplos, John, Michael Magill, and Martine Quinzii. "Demography and 
the Long-Run Predictability of the Stock Market." Cowles Foundation 
Paper No. 1099. Cowles Foundation for Research in Economics, Yale 
University: 2004. 

Goyal, Amit. "Demographics, Stock Market Flows, and Stock Returns." 
Journal of Financial and Quantitative Analysis, vol. 39, no. 1 (2004): 
115-142. 

Helmenstein, Christian, Alexia Prskawetz, Yuri Yegorov. "Wealth and 
Cohort Size: Stock Market Boom or Bust Ahead?" MPIDR Working Paper WP 
2002-051. Max-Planck Institute for Demographic Research, 2002. 

Lim, Kyung-Mook and David N. Weil. "The Baby Boom and the Stock Market 
Boom." Scandinavian Journal of Economics, vol. 105, no. 3 (2003): 359- 
378. 

Macunovich, Diane. "Discussion of Social Security: How Social and 
Secure Should It Be?" In Social Security Reform: Links to Saving, 
Investment, and Growth. Steven Sass and Robert Triest, eds., Boston: 
Federal Reserve Bank of Boston (1997): 64-74. 

Poterba, James M. "Demographic Structure and Asset Returns." The Review 
of Economics and Statistics, vol. 83, no. 4 (2001): 565-584. 

Poterba, James M. "The Impact of Population Aging on Financial 
Markets." Working Paper 10851. Cambridge, Mass.: National Bureau of 
Economic Research, 2004. 

Yoo, Peter S. "Age Distributions and Returns of Financial Assets." 
Working Paper 1994-002A. St. Louis: Federal Reserve Bank of St. Louis, 
1994. 

Yoo, Peter S. "Population Growth and Asset Prices." Working Paper 1997- 
016A. St. Louis: Federal Reserve Bank of St. Louis, 1997. 

Young, Garry. "The Implications of an Aging Population for the UK 
Economy." Bank of England Working Paper no. 159. Bank of England, 
London: 2002. 

[End of section] 

Appendix III: Summary of the Simulation-Based and Empirical Studies 
Assessing the Impact of a Baby Boom on Financial Markets: 

Table 2: Simulation-Based Studies Assessing the Impact of a Baby Boom 
on Financial Markets: 

Study: Abel (2001 and 2003); 
Objective: Assess the impact of a baby boom on the price of capital, 
with and without a bequest motive; 
Model: Overlapping-generations model, with agents living for two 
periods: working when young but not when old; 
Key assumptions: Model assumes a closed economy, agents supply labor 
inelastically, and a convex adjustment cost technology for converting 
consumption goods into capital goods. In one scenario, the model 
assumes agents have no bequest motive. In the other, it assumes agents 
have a bequest motive, so they do not consume all of their wealth 
during retirement; 
Asset(s): Capital; 
Channel through which baby boom affects asset returns: Baby boomers 
affect the price of capital through their aggregate savings and, in 
turn, demand for assets. Assuming a bequest motive does not attenuate 
the reduction in the price of capital when baby boomers retire. 
Although retirees do not sell all of their capital, there is more 
capital in the economy, because retirees save more when working in 
anticipation of leaving bequests; 
Implications: Model suggests that baby boomers will increase stock 
returns while in the labor force and will reduce stock returns in 
retirement. 

Study: Brooks (1998, 2000, 2002, and 2003); 
Objective: Assess the impact of the baby boom on stock and bond 
returns, including the equity premium; 
Model: Overlapping-generations model, with agents living for four 
periods: childhood, young working age, old working age, and retirement; 
Key assumptions: Model assumes a closed economy, agents supply labor 
inelastically, and agents make a portfolio decision over risky capital 
or safe bonds. In one scenario, model assumes agents do not receive 
social security benefits; 
in another scenario, it assumes they do; 
Asset(s): Risky capital and safe bonds; 
Channel through which baby boom affects asset returns: Demographic 
shifts lead to changes in aggregate savings over time, causing the real 
interest rate to vary and, in turn, push stock and bond returns in the 
same direction. Changes in stock returns mirror wage income, which 
moves inversely with the size of the labor force and reflects changes 
in the capital-labor ratio; 
Implications: Model suggests that baby boomers will increase stock and 
bond returns while in the labor force and reduce stock and bond returns 
but increase the equity premium in retirement. 

Study: Börsch-Supan, Ludwig, and Winter (2004); 
Objective: Assess the effects of population aging and pension reform on 
international capital markets; 
Model: Multi-country overlapping generations model; 
Key assumptions: Model assumes countries and regions are modeled 
symmetrically as open economies; 
demographic changes capture survival rates, immigration, and fertility 
rates; 
variable labor supply in some scenarios; 
and bequests are accidental; 
Asset(s): Capital; 
Channel through which baby boom affects asset returns: Changes in 
aggregate savings and labor supply affect the ratio of capital to labor 
and capital to output and hence the rate of return, where the rate of 
return to capital moves negatively with the capital-to-output ratio; 
Implications: Model suggests that baby boomers will increase stock 
returns while in the labor force and reduce stock returns in 
retirement. 

Study: Bütler and Harms (2001); 
Objective: Assess the impact of a baby boom on the price of capital; 
Model: Overlapping-generations model, with three living generations; 
Key assumptions: Model assumes a closed economy, agents have perfect 
foresight and leave no bequests, economy produces a consumption good 
and physical capital, agents can transfer income across periods by 
buying bonds or physical capital that is safe, labor supply is 
endogenous in some scenarios, and no social security exists; 
Asset(s): Bonds and physical capital that provides rent; 
Channel through which baby boom affects asset returns: Due to their 
large size and impact on the capital-to-labor ratio, baby boomers 
depress the wage rate but prop up the return to capital when working. 
In retirement, they contribute to a rise in the wage rate and depress 
the return to capital. Endogenous labor supply dampens factor price 
fluctuations by allowing baby-boom parents and children to shift their 
labor supply to take advantage of the baby boomers' impact on the 
returns to capital and labor; 
Implications: Model suggests that baby boomers will increase stock 
returns while in the labor force and reduce stock returns in 
retirement. The swing in returns can be attenuated by the working and 
saving behavior of the generations preceding and following the baby 
boomers. 

Study: Geanakoplos, Magill, and Quinzii (2004); 
Objective: Assess the impact of the combination of life-cycle behavior 
and changing demographic structure on stock prices and the equity 
premium; 
Model: Overlapping-generations model, with agents living for three 
periods: young adult, middle age, and retirement; 
Key assumptions: Model assumes a closed economy, agents supply labor 
inelastically, and a large cohort is deterministically followed by a 
smaller cohort. It then adds other assumptions, including children, 
social security, bequests, uncertainty with wages and dividends, and 
capital stock with adjustment costs; 
Asset(s): Safe bonds and, in later versions of the model, equity 
contract representing claims on capital; 
Channel through which baby boom affects asset returns: In the basic 
model, demographic shifts lead to excess demand for consumption or 
saving, requiring interest rates to change and, in turn, bond and 
equity prices to move inversely with such change. Model also shows that 
large cohorts drive the terms of trade against themselves by being so 
numerous, favoring the small cohorts on the other side of the market 
that follow or precede them; 
Implications: Model suggests that baby boomers will increase stock and 
bond returns while in the labor force and reduce stock and bond returns 
but increase the equity premium in retirement. 

Study: Helmenstein, Prskawetz, and Yegorov (2002); 
Objective: Assess the effect of population aging on the financial 
markets when wealth is unevenly distributed; 
Model: Theoretical model, with economic behaviors assumed rather than 
derived from optimizing agents; 
Key assumptions: Model assumes wealth accrues from bequests and 
savings, which are accumulated as a fraction of wage income; 
and the population is divided into different generations, each of which 
has equal amount of wealth but is composed of low and high-wealth 
individuals. High-wealth individuals receive a bequest at age 20, hold 
their wealth in stocks, consume only labor income, and work their 
entire lives; 
low-wealth individuals follow the life-cycle hypothesis; 
Asset(s): Safe bonds and stock that is also safe; 
Channel through which baby boom affects asset returns: In the model 
where wealth is uniformly distributed among high- wealth individuals, 
the increase in demand for stocks and bonds by baby boomers when in the 
work force causes prices to rise. Likewise, the spending of savings by 
baby boomers in retirement causes prices to decline; 
Implications: Model suggests that baby boomers will increase stock and 
bond returns while in the labor force and reduce stock and bond returns 
in retirement. The decline in returns, however, could be attenuated if 
wealth is not evenly distributed. 

Study: Lim and Weil (2003); 
Objective: Assess the impact of the baby boom on stock prices; 
Model: Macro-demographic model of linked dynasties; 
Key assumptions: Model assumes production and investment are carried 
out by identically competitive firms that maximize the present 
discounted values of their cash flows; 
firms making investments face installation costs that are a positive 
function of the ratio of investment to capital; 
closed economy; 
and labor supply is exogenous; 
Asset(s): Capital; 
Channel through which baby boom affects asset returns: Demographics 
affect stock prices through the installation cost of capital. As 
capital is the only savings vehicle, greater savings drives up the 
price of capital. The larger the adjustment costs, the larger are the 
movements in stock prices; 
Implications: Model suggests that baby boomers will increase stock 
returns while in the labor force and reduce stock returns in 
retirement. 

Study: Yoo (1997); 
Objective: Assess the impact of a baby boom on asset prices; 
Model: Overlapping-generations model, with agents living for 55 periods 
and receiving an age-dependent endowment during the first 45 periods; 
Key assumptions: Model assumes a closed economy, an agent's demand for 
an asset does not respond to expectations of future prices, supply of 
capital is fixed, and agents supply labor inelastically. The model 
later relaxes assumptions about expectations of future prices and the 
fixed supply of capital; 
Asset(s): Capital; 
Channel through which baby boom affects asset returns: Variation in a 
population's age distribution affects the aggregate demand for an asset 
by changing the distribution of asset holders. This variation in 
aggregate demand for an asset produces the relationship between a 
population's age distribution and asset prices; 
Implications: Model suggests that baby boomers will increase stock 
returns while in the labor force and reduce stock returns in 
retirement. The effect is attenuated if the supply of capital varies. 

Study: Young (2002); 
Objective: Assess the impact of a baby boom and other demographics 
shocks on asset prices; 
Model: Overlapping- generations model; 
Key assumptions: Model assumes agents will save for old age, but some 
will die before old age, with their savings being bequeathed to the 
next generation; 
agents supply labor exogenously in varying amounts and degrees of 
effectiveness over their lifetime; 
agents can hold assets that pay a rate of return, and receive bequests; 
agents live up to five periods and consume a decreasing amount of their 
wage income in each period; 
Asset(s): Capital; 
Channel through which baby boom affects asset returns: The baby boom 
increases labor supply and lowers the capital-to-labor ratio, raising 
the marginal product of capital and interest rate and reducing the 
marginal product of labor and wage rate. When baby boomers are in the 
work force, aggregate savings is raised; 
thus, when boomers retire, the raised capital drives down the interest 
rate on retirement; 
Implications: Model suggests that baby boomers will increase stock 
returns while in the labor force and reduce stock returns in 
retirement. 

Source: GAO summary of studies. 

[End of table] 

Table 3: Empirical Studies Assessing the Impact of a Baby Boom on 
Financial Markets: 

Study: Ang and Maddaloni (2003); 
Objective: Tests for associations between demographic variables and 
equity premium in the United States and other countries; 
Demographic variable(s): Average age of population above 20 years old; 
Percentage of the population age 65 and over; 
Percentage of the population in the working ages of 20 to 64; 
Asset variable(s): Difference between the compounded total return of 
the stock market index and compounded return on a risk-free asset; 
Time frame of analysis: 1900-2001 for the United States, France, 
Germany, and United Kingdom; 
1920-2001 for Japan; 
Key results: Demographic changes predicted future changes in the equity 
premium in the international data but only weakly in the U.S. data. 

Study: Bakshi and Chen (1994); 
Objective: Tests for associations between demographic variable and 
equity premium; 
Demographic variable(s): Average age of population over age 20; 
Asset variable(s): Excess return on S&P 500 stock index; 
Time frame of analysis: 1946 to 1990; 
Key results: In the United States, increases in the average age of 
persons older than age 20 predicted a higher risk premium. 

Study: Bergantino (1998); 
Objective: Tests for associations between demographic variables and (1) 
stock and bond prices and (2) equity premium in the United States; 
Demographic variable(s): Growth in the demographic demand for financial 
assets constructed from time series of cross-sectional profiles of 
stock and bond holdings; 
Ratio of demographic demand for stocks to demographic demand for bonds; 
Asset variable(s): Average annual rate of real price appreciation of 
(1) the S&P 500 stock index and (2) long-term government bonds; 
Time frame of analysis: 1946 to 1997; 
Key results: In the United States, the increase in the demand for 
stocks and bonds based on demographic changes increased stock and bond 
prices but had no effect on the equity premium. 

Study: Brooks (1998); 
Objective: Tests for associations between demographic variables and (1) 
stock and bond prices and (2) stock prices relative to bond prices in 
the United States and other countries; 
Demographic variable(s): Population age 40 to 64 divided by rest of the 
population; 
Population age 40 to 64 divided by population age 65 and older; 
Asset variable(s): Logged annual (1) stock price indices for a cross-
section of countries and (2) price indices for bonds based on yields to 
maturity of long-term government bonds; 
Time frame of analysis: 1950 to 1995; 
Key results: The increase in people age 40 to 64 relative to the rest 
of the population increased stock and bond prices, particularly in the 
United States. Also, the increase in people 40 to 64 relative to people 
over 65 increased the equity premium. 

Study: Davis and Li (2003); 
Objective: Tests for associations between demographic variables and 
stock and bond prices in the United States and other countries; 
Demographic variable(s): Percentage of the population (1) age 20 to 39 
and (2) age 40 to 64; 
Asset variable(s): Change in annual average level of (1) real stock 
price index (excluding dividends) and (2) real long-term bond yield; 
Time frame of analysis: 1950 to 1999 for stocks; 
1960 to 1999 for bonds; 
Key results: The relative increase in people age 40 to 64 increased 
stock prices and decreased long-term bond yields in the United States 
and other countries. 

Study: Geanakoplos, Magill, and Quinzii (2004); 
Objective: Tests for associations between demographic variable and 
financial asset prices and returns in the United States and other 
countries; 
Demographic variable(s): Ratio of population age 40 to 49 to population 
age 20 to 29; 
Asset variable(s): Price-to-earnings ratio, real return on S&P 500 
stock index, real short-term interest rate, and real stock price index 
of foreign countries; 
Time frame of analysis: 1910 to 2002 for the United States; 
1950 to 2001 for the foreign countries; 
Key results: In the United States, the relative increase in the 
population age 40 to 49 increased stock returns. The results for the 
other countries included in the study were mixed. 

Study: Goyal (2004); 
Objective: Tests for, among other things, associations between 
demographic variables and the equity premium; 
Demographic variable(s): Percentage change and level of population age 
25 to 44, age 45 to 64, and age 65 and over; 
Average age of person over age 25; 
Asset variable(s): Difference between logged S&P 500 stock returns and 
logged Treasury bill rate; 
Time frame of analysis: 1926 to 1998; 
Key results: In the United States, the relative increase in persons age 
45 to 64 increased the equity premium. 

Study: Macunovich (1997); 
Objective: Tests for associations between demographic variables and 
stock prices; 
Demographic variable(s): Logged annual change in U.S. population age 6, 
9, 18, 27, 45, 66, and total U.S. population; 
Asset variable(s): 3-year moving average of the annual change in the 
Dow Jones Industrial Average; 
Time frame of analysis: 1934 to 1994; 
Key results: In the United States, the increase in people age 45 and 66 
decreased stock returns. 

Study: Poterba (2004); 
Objective: Tests for associations between demographic variables and 
stock and bond returns in the United States; 
Demographic variable(s): Percentage of population age 40 to 64; 
percentage of population over age 65; 
population age 40 to 64 divided by population age 20 and older; 
and population over age 65 divided by population age 20 and older; 
Asset variable(s): Annual real returns for Treasury bills, long-term 
government bonds, and large corporate stocks based on S&P 500; 
Time frame of analysis: 1926 to 2003 for United States; 
Key results: In the United States, the relative increase in people age 
40 to 64 decreased short-term government bond returns but had no effect 
on long-term government bond or stock returns. 

Study: Yoo (1994); 
Objective: Tests for associations between demographic variables and 
stock and bond returns; 
Demographic variable(s): Percentage of population age 25 to 34, age 35 
to 44, age 45 to 54, and age 65 and over; 
Asset variable(s): Annual real returns of common stock, small company 
stock, long-term corporate bonds, long- term government bonds, 
intermediate-term government bonds, and Treasury bills; 
Time frame of analysis: 1926 to 1988; 
Key results: In the United States, the relative increase in people age 
45 to 54 decreased annual returns of short and intermediate-term 
government bonds but had no effect on the annual returns of stock and 
long-term government or corporate bonds. 

Source: GAO summary of studies. 

[End of table] 

[End of section] 

Appendix IV: Econometric Analysis of the Impact of Demographics on 
Stock Market Returns: 

This appendix discusses our analysis of the impact of demographics and 
macroeconomic and financial factors on U.S. stock market returns from 
1948 to 2004. In particular, we discuss (1) the development of our 
model used to estimate the relative importance of demographics and 
other factors in determining stock market returns, (2) the data 
sources, and (3) the specifications of our econometric model, potential 
limitations, and results. 

GAO's Econometric Model of the Effects of Demographic, Macroeconomic, 
and Financial Factors on Stock Market Returns: 

We developed an econometric model to determine the effects of changes 
in demographic, macroeconomic, and financial variables on stock market 
returns from 1948 to 2004. Our independent empirical analysis is meant 
to address two separate but related questions: 

* Are the demographic effects on stock returns found in some of the 
empirical literature[Footnote 73] still apparent when additional 
control variables--macroeconomic and financial indicators known to be 
associated with stock returns--are present in the regression analysis? 

* How much of the variation in stock returns is explained by those 
macroeconomic and financial indicators as compared to demographic 
variables? 

Answering the first question serves to address the possibility of 
omitted variable bias in simpler regression specifications. For 
example, studies by Poterba;[Footnote 74] Geanakoplos, Magill, and 
Quinzii (hereafter, GMQ); and Yoo[Footnote 75] use only demographic 
variables as their independent variables. The omission of relevant 
variables in regressions of this kind will result in biased estimates 
of the size and significance of the effects under investigation. 
Answering the second question serves to put the influence of 
demographics on stock returns in perspective: How much of stock market 
movements are explained by demographics as opposed to other variables? 
To answer the questions we include a series of demographic variables 
from the literature we reviewed in a multivariable regression model. We 
relied primarily on information in a seminal study done by Eugene Fama 
to develop our model.[Footnote 76] 

Data and Sample Selection: 

We analyzed the determinants of real (adjusted for inflation) total 
(including both price changes and dividends) returns of the Standard 
and Poor's (S&P) 500 Index from 1948 to 2004. We chose the S&P 500 
Index as our dependent variable not only because it is widely regarded 
as the best single gauge of U.S. equities market and covers over 80 
percent of the value of U.S. equities but also because S&P 500 Index 
mutual funds are by far the largest and most popular type of index 
fund. Due to changes in the structure of financial markets over time, 
we chose a shorter time horizon to minimize the likelihood of a 
structural break in the data.[Footnote 77] For our independent 
variables, we selected macroeconomic and financial variables that 
economic studies have found to be important in explaining stock returns 
and were used in Fama's analysis to determine how much of stock market 
variation they explained.[Footnote 78] We selected two demographic 
variables, the proportion of the population age 40-64 and the ratio of 
the population age 40-49 to the population age 20-29 (the middle-young 
or "MY" ratio), that had statistically significant coefficients in 
several of the empirical studies that we reviewed.[Footnote 79] Table 1 
presents the independent and dependent variables in our model and their 
data sources. For consistency, we estimate the equation four times 
using both levels and changes in the two demographic variables. 

Table 4: Names, Definitions and Data Sources of Variables Used in Our 
Regression Models: 

Stock Returns; 
Dependent variable: Real annual returns to the S&P 500 Index from 
Robert Shiller's calculations. 

Control Variables: Dividend yield; 
Independent variable: Dividends paid to shares of stocks in the S&P 500 
Index, divided by the share price, from Moody's Economy.com (lagging). 

Control Variables: Term spread; 
Independent variable: The difference between yields on Moody's AAA 
corporate bonds and the 3-month T-bill, from the Federal Reserve Bank 
of St. Louis (lagging). 

Control Variables:  Default spread shock; 
Independent variable: Unexpected changes to the difference between 
Moody's BAA and AAA corporate bonds, calculated as residuals from an 
AR(1) regression, from the Federal Reserve Bank of St. Louis. 

Control Variables: Industrial production; 
Independent variable: Industrial Production Index of U.S. 
manufacturing, mining, and electric and gas utilities, from the Board 
of Governors of the Federal Reserve (leading)[A]. 

Demographic variables: Middle age-to-young (MY) ratio; 
Independent variable: Ratio of individuals in the United States ages 40 
to 49 over 20 to 29, from the U.S. Census Bureau. 

Demographic variables: Proportion 40-64; 
Independent variable: Proportion of individuals in the U.S. ages 40-64, 
from the Census Bureau. 

Source: GAO analysis of S&P 500 returns, 1948-2004. 

[A] For industrial production, because it is leading, we assume that 
the causality is wholly from growth in industrial production to stock 
returns, and not vice versa. This is consistent with the literature, as 
expressed in Nai-Fu Chen, Richard Roll, and Stephen A. Ross, "Economic 
Forces and the Stock Market," Journal of Business, vol. 59, no. 3 
(1986), "stock prices are usually considered as responding to external 
forces." Further, in Paul Beaudry and Franck Portier, "Stock Prices, 
News and Economic Fluctuations," Working Paper 10548 (Cambridge, Mass.: 
National Bureau of Economic Research, 2004), the authors find that 
stock prices respond today to news about productivity shocks that will 
effect the economy with a substantial delay. This implies that higher 
industrial production in the future should cause higher stock returns 
today. 

[End of table] 

Model Specification, Limitations, and Estimation: 

We estimated the following regression equation: 

r(t) = Beta(0) + Beta(1x1,t-1) + Beta(2x2,t-1) + Beta(3x3,t) + 
Beta(4x4,t+1) + Theta(yt) + Epsilon(t): 

where r(t) is real stock market returns during calendar year t, xi are 
four control variables (the dividend yield, the term spread, shocks to 
the default spread, and growth of industrial production, respectively) 
adapted from Fama's study,[Footnote 80] yt is the demographic variable, 
and t is the error at time t. The error structure is modeled assuming 
White's heteroskedasticity-consistent covariance matrix. We first 
estimate the equation without a demographic variable to measure the 
proportion of variation explained by macroeconomic and financial 
indicators, followed by estimating the regression equation four 
separate times to include each of the demographic measures. [Footnote 
81]For the benchmark model, we find no evidence of serial 
autocorrelation or deviations from normality.[Footnote 82] 

Despite standard diagnostics and careful regression specification, some 
limitations of our analysis remain. We cannot be certain that we have 
chosen the best variables to represent the aspects of the economy that 
move the stock market or the demographic variables that may influence 
stock returns as well. We have attempted to choose appropriate 
variables based on the existing empirical and theoretical literature on 
the economic and demographic determinants of stock returns. 
Nevertheless, even these variables may be measured with error. 
Generally, measurement errors would cause us to underestimate the 
importance of those variables that have been measured with error. This 
would be most problematic in the case of our demographic variables, 
though measurement error in our economic and financial control 
variables actually makes our estimates conservative. Nevertheless, we 
assessed the reliability of all data used in this analysis, and found 
all data series to be sufficiently reliable for our purposes. As a 
result, we believe that the limitations mentioned here (and related to 
the direction of causality in industrial production mentioned above) do 
not have serious consequences for the interpretation of our results. 

The regression results are presented in tables 2 through 6 below. Our 
results are consistent with the literature on the determinants of stock 
market returns, especially Fama's study, in that several of our 
macroeconomic and financial variables are statistically significant, 
and they account for a substantial proportion (roughly 47 percent) of 
the variation in stock returns. The coefficient of determination in 
Fama's study could be higher due to the inclusion of more industrial 
production leads. 

The finding in Davis and Li's study that the 40-64 population had a 
statistically significant impact on stock returns is not robust to 
alternative specifications, as demonstrated in Table 6. The proportion 
of the population 40-64 is no longer a statistically significant 
determinant of stock returns, and the inclusion of the variable 
improves the R-squared by less than 1.5 percent. However, changes in 
the 40-64 population are significant, and account for an additional 8 
percent of the variation in stock returns. 

The MY ratio and changes in the MY ratio are statistically significant, 
as seen in Tables 5 and 6, and the model with changes in the MY ratio 
accounts for a higher proportion of the variation in stock returns than 
the model estimated with the level of the ratio.[Footnote 83] 

Table 5: Stock Market Returns Regression Results--Baseline Model: 

Parameter: Intercept; 
Estimate: -0.104809; 
p-value: 0.0636. 

Parameter: Dividend yield; 
Estimate: 0.024963; 
p-value: 0.0462. 

Parameter: Term spread; 
Estimate: 0.012387; 
p-value: 0.4650. 

Parameter: Shocks to the default spread; 
Estimate: -0.105986; 
p-value: 0.1698. 

Parameter: Industrial production; 
Estimate: 2.097360; 
p-value: <0.0001. 

Parameter: R-squared; 
Estimate: 0.465597; 
p-value: NA. 

Source: GAO analysis of S&P 500 returns, 1948-2004. 

[End of table] 

Table 6: Stock Market Returns Regression Results--Middle Age Model: 

Parameter: Intercept; 
Estimate: -0.549744; 
p-value: 0.2546. 

Parameter: Dividend yield; 
Estimate: 0.036523; 
p-value: 0.0095. 

Parameter: Term spread; 
Estimate: 0.013526; 
p-value: 0.4516. 

Parameter: Shocks to the default spread; 
Estimate: -0.109996; 
p-value: 0.2196. 

Parameter: Industrial production; 
Estimate: 2.031814; 
p-value: <0.0001. 

Parameter: Proportion middle aged (40-64); 
Estimate: 1.513299; 
p-value: 0.3610. 

Parameter: Change in R-squared; 
Estimate: 0.014389; 
p-value: NA. 

Source: GAO analysis of S&P 500 returns, 1948-2004. 

[End of table] 

Table 7: Stock Market Returns Regression Results--Change in Middle Age 
Model: 

Parameter: Intercept; 
Estimate: -0.201542; 
p-value: 0.0008. 

Parameter: Dividend yield; 
Estimate: 0.053588; 
p-value: 0.0004. 

Parameter: Term spread; 
Estimate: -0.002828; 
p-value: 0.8802. 

Parameter: Shocks to the default spread; 
Estimate: -0.095472; 
p-value: 0.2514. 

Parameter: Industrial production; 
Estimate: 2.056497; 
p-value: <0.0001. 

Parameter: Change in proportion middle aged (40-64); 
Estimate: 27.52932; 
p-value: 0.0044. 

Parameter: Change in R-squared; 
Estimate: 0.080823; 
p-value: NA. 

Source: GAO analysis of S&P 500 returns, 1948-2004. 

[End of table] 

Table 8: Stock Market Returns Regression Results--Middle-Young Ratio 
Model: 

Parameter: Intercept; 
Estimate: -0.467783; 
p-value: 0.0094. 

Parameter: Dividend yield; 
Estimate: 0.052177; 
p-value: 0.0003. 

Parameter: Term spread; 
Estimate: 0.026824; 
p-value: 0.2163. 

Parameter: Shocks to the default spread; 
Estimate: -0.167018; 
p-value: 0.1369. 

Parameter: Industrial production; 
Estimate: 1.877306; 
p-value: <0.0001. 

Parameter: MY ratio (age 40-49/ age 20-29); 
Estimate: 0.286547; 
p- value: 0.0409. 

Parameter: Change in R-squared; 
Estimate: 0.055683; 
p-value: NA. 

Source: GAO analysis of S&P 500 returns, 1948-2004. 

[End of table] 

Table 9: Stock Market Returns Regression Results--Change in Middle- 
Young Ratio Model: 

Parameter: Intercept; 
Estimate: -0.055320; 
p-value: 0.3315. 

Parameter: Dividend yield; 
Estimate: 0.017724; 
p-value: 0.1314. 

Parameter: Term spread; 
Estimate: -0.006925; 
p-value: 0.7323. 

Parameter: Shocks to the default spread; 
Estimate: -0.102432; 
p-value: 0.1668. 

Parameter: Industrial production; 
Estimate: 2.227720; 
p-value: <0.0001. 

Parameter: Change in MY ratio (age 40-49/ age 20-29); 
Estimate: 1.903652; 
p-value: 0.0064. 

Parameter: Change in R-squared; 
Estimate: 0.079029; 
p-value: NA. 

Source: GAO analysis of S&P 500 returns, 1948-2004. 

[End of table] 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

Contacts: 

Barbara D. Bovbjerg (202) 512-7215: 

George A. Scott (202) 512-5932: 

Staff Acknowledgments: 

In addition to the contacts above, Kay Kuhlman, Charles A. Jeszeck, 
Joseph A. Applebaum, Mark M. Glickman, Richard Tsuhara, Sharon Hermes, 
Michael Hoffman, Danielle N. Novak, Susan Bernstein, and Marc Molino 
made important contributions to this report. 

FOOTNOTES 

[1] See GAO, 21st Century Challenges: Reexamining the Base of the 
Federal Government, GAO-05-325SP (Washington, D.C.: Feb. 1, 2005); 
21st Century Challenges: Transforming Government to Meet Current and 
Emerging Challenges, GAO-05-830T (Washington, D.C.: July 13, 2005); 
and 21st Century: Addressing Long-Term Fiscal Challenges Must Include a 
Re- examination of Mandatory Spending, GAO-06-456T (Washington, D.C.: 
Feb. 13. 2006). 

[2] The SCF is a nationally representative survey sponsored by the 
Federal Reserve Board containing detailed information on assets and 
debt of U.S. households. We define baby boomers in our analysis of SCF 
as a household headed by an individual born between 1946 and 1964. HRS 
is a nationally representative biennial survey of older Americans 
produced by the University of Michigan and sponsored by the National 
Institute on Aging. 

[3] We define financial assets as stocks, bonds (excluding U.S. savings 
bonds), mutual funds, Individual Retirement Accounts, Keogh accounts, 
account-type retirement savings plans, and assets in annuities, trusts, 
and managed accounts that are invested in stocks and bonds. 

[4] The fertility rate is the average number of children born to a 
woman between the ages 15 to 44, among all women who survive to age 44. 

[5] These demographic changes are not unique to the United States. 
Other developed countries are undergoing demographic change similar or 
greater in magnitude than the United States. For example, the elderly 
dependency ratio for Italy and Japan is projected to rise from around 1 
person age 65 or over for every 4 people age 15 to 64 to around 1 older 
person for every 1.5 younger people from 2000 to 2050; 
Spain and Germany will also face a steeply rising dependency ratio over 
the same period. In comparison, the ratio for the United Kingdom is 
expected to increase at a similar pace as the U.S. ratio. 

[6] In determining wealth for the purposes of this report, we added all 
assets that each household owns and subtracted all outstanding debts. 

[7] For purposes of this report, we consider people to be retired if 
they self-report they are retired in the SCF or HRS. We refer to full 
retirement as when an individual stops working for pay altogether. 

[8] Because DB pension plans are future income payments and not assets 
held in an account, they are not included in calculating financial 
assets or wealth with the SCF data. 

[9] Christopher D. Carroll, "Portfolios of the Rich," National Bureau 
of Economic Research, Working Paper No. 7826 (August 2000). 

[10] At the close of 2004, assets invested in the New York Stock 
Exchange and NASDAQ totaled $16.1 trillion, and assets in domestic 
bonds, both corporate and government, excluding money markets, totaled 
$20.7 trillion. 

[11] An important distinction between current retirees and baby boomers 
is that the latter are more likely to rely on DC pensions for 
retirement income, which may affect how they spend down their assets. 
Research has shown that there is a lower propensity to spend assets 
from a DC plan when compared to income from a DB plan. While 
approximately 16 percent of people older than baby boomers have DC 
pensions as part of their retirement savings plan, about 42 percent of 
older boomers and 45 percent of younger boomers have DC pensions. A DB 
pension provides a guaranteed benefit usually in the form of an 
annuity, whereas a DC pension is an individual account whose value 
depends on contributions and investment returns. Another difference is 
that benefits from DB plans are insured up to specified limits by the 
Pension Benefit Guaranty Corporation. 

[12] This measure of stock purchases includes stock or money put into a 
mutual fund, including automatic reinvestments. 

[13] This measure of stock sales and purchases does not include IRAs, 
Keoghs, or pension accounts. 

[14] In addition, for investments in real estate (not including a 
primary residence) and private businesses, assets that few retirees 
hold, we found that the majority of retirees do not sell these assets 
off quickly. According to the HRS, approximately 22 percent of retirees 
owned real estate and about 10 percent owned shares in a private 
business in 2004. These assets represented a significant share of net 
wealth among those retirees who held them--for retirees with both real 
estate and private business holdings, these combined assets represent, 
on average, about half of total wealth. However, from 1994 to 2004 time 
period, only about one-quarter of these retirees sold real estate and 8 
percent sold an interest in a private business. 

[15] While investments in equities are viewed to be a hedge against 
inflation and have higher average returns than bonds, they are riskier 
investments compared to most bond investments, and therefore pose more 
of a risk of loss of value in the short run. A loss in portfolio value 
would be especially harmful to retirees, as they are less likely to be 
able to return to work to make up for a loss in wealth and they have a 
shorter time horizon to recoup their losses in the market. 

[16] Researchers similarly have found that the percentage of net worth 
invested in common stocks shows very little decline after age 60, with 
the share of net worth held as common stocks never falling below the 
percentage observed for 45 to 49 year-olds. See Barry P. Bosworth, 
Ralph C. Bryant, and Gary Burtless, "The Impact of Aging on Financial 
Markets and the Economy: A Survey" (Washington, D.C.: The Brookings 
Institution, July 2004). 

[17] James Poterba, "The Impact of Population Aging on Financial 
Markets," Working Paper No. 10851 (Cambridge, Mass.: National Bureau of 
Economic Research, 2004). 

[18] Michael D. Hurd, "Research on the Elderly: Economic Status, 
Retirement, and Consumption and Saving," Journal of Economic 
Literature, Vol. 28, No. 2 (June 1990, 565-637); 
and Laurence J. Kotlikoff, "Intergenerational Transfers and Savings," 
The Journal of Economic Perspectives, Vol. 2, No. 2 (Spring 1988, 41-
58). 

[19] Hurd, "Research on the Elderly: Economic Status, Retirement, and 
Consumption and Saving," p. 612. 

[20] Alicia H. Munnell, Annika Sunden, Mauricio Soto, and Catherine 
Taylor, "How Will the Rise in 401(k) Plans Affect Bequests?", Issue 
Brief No. 10 (Boston: Center for Retirement Research at Boston College, 
Nov. 2002.) 

[21] Research has shown that inefficiencies exist in the annuity market 
due to a lack of competition and adverse selection among those who 
purchase annuities. Adverse selection in the annuities market occurs 
because people who buy annuities also tend to live longer, which is 
adverse to the insurer. See Olivia S. Mitchell, James M. Poterba, Mark 
J. Warshawsky, and Jeffrey R. Brown, "New Evidence on the Money's Worth 
of Individual Annuities," The American Economic Review, Vol. 89, No. 5 
(Dec. 1999) and National Center for Policy Analysis, "Social Security 
and Market Risk: The Annuity Market: Present and Future," http:// 
www.ncpa.org/pub/st/st244/s244c.html (accessed June 21, 2006). 

[22] See GAO, Older Workers: Labor Can Help Employees and Employers 
Better Plan for the Future, GAO-06-80 (Washington, D.C.: December 
2005). 

[23] Countering this potential effect is that the move away from DB 
plans would mean that plan sponsors might have less of a need to sell 
assets to pay current retirees. 

[24] The majority of nursing home care and home health care costs are 
not paid by private insurance or Medicare. In many cases, the burden of 
these expenses are borne by the patient receiving care, until they have 
spent down nearly all of their assets and become eligible for Medicaid, 
which does cover these costs. Peter Kemper, Harriet L Komisar, and Lisa 
Alecxih, "Long-Term Care Over an Uncertain Future: What Can Current 
Retirees Expect?" Inquiry, Vol. 42, No. 4, Mar. 2006, pp. 335-350. 

[25] The Flow of Funds Accounts data report amounts held in mutual fund 
shares but do not report the proportion of these shares that represent 
stock holdings. We assume that all assets listed in mutual fund shares 
are held in stocks to show the maximum amount of assets that could be 
held as stock. 

[26] The study also noted that when the pension system begins to be a 
net seller of financial assets, it could depress asset prices, 
including stocks, bonds, and real estate. See Sylvester J. Schieber and 
John B. Shoven, "The Consequences of Population Aging on Private 
Pension Fund Saving and Asset Markets," Working Paper No. 4665 
(Cambridge, MA: National Bureau of Economic Research, 1994). 

[27] Other factors might also cause DB plans to sell stocks in the near 
future. The number of plans, which has been in decline since the mid- 
1980s, continues to shrink, and as plans terminate, they use their 
assets to pay lump sum benefits or turn their assets over to insurance 
companies or the Pension Benefit Guaranty Corporation, entities that 
tend to hold more bonds than stocks. As DB plans continue to terminate, 
this trend would likely cause a decline in the level of stocks in the 
DB system. Also, pending pension reform legislation in Congress may 
create incentives for plan sponsors to shift their asset allocation 
from stocks toward bonds and other less volatile assets. 

[28] From the perspective of the overall economy, increased employment 
at older ages would also support continued growth of the labor supply, 
which may improve the productivity of and financial returns to capital. 

[29] In general, partial retirement refers to someone who classifies 
himself or herself as partially or fully retired but is still working 
for pay on a part-time basis. 

[30] AARP, Baby Boomers Envision Retirement II: Survey of Baby Boomers' 
Expectations for Retirement, Prepared for AARP Environmental Analysis 
by Roper ASW, 2004. 

[31] Putnam Investments, Retirement Only a Breather: 7 Million Go Back 
to Work. (Research conducted by Brightwork Partners, 2005). 

[32] In prior work, we found that, although the majority of full-time 
workers age 55 or older indicate they would like to gradually reduce 
their work hours in transition to full retirement, many are constrained 
by health problems or perceive limited employment opportunities. See: 
GAO, Older Workers: Labor Can Help Employers and Employees Plan Better 
for the Future, GAO-06-80 (Washington, D.C.: Dec. 5, 2005). 

[33] Reverse mortgages allow those aged 62 and older to access equity 
in their homes through lump-sum payments, structured monthly payments, 
or lines of credit to the homeowner based on the value of the home. 
Once the borrower moves from the residence or dies, the principal, 
interest, and all fees immediately come due. 

[34] The debt-to-value ratio measures total debt in relation to total 
assets. The percentage of debt to assets increases as a person takes on 
more debt relative to the underlying asset, such as a home or an 
automobile. 

[35] In the studies that we reviewed some researchers measured changes 
in the stock market based on annual price changes, while others used 
annual rates of return. The two measures are highly correlated, with 
rates of return taking into account dividends paid to shareholders as 
well as price changes. For bonds, some researchers measured changes in 
the market by annual prices changes, while others used yields or 
returns. Bond prices and yields are inversely related, with an increase 
in the price of a bond reducing its yield. When discussing the results 
of the individual studies, we used the market-performance measure used 
by the researchers. 

[36] See appendix II for a list of the studies we reviewed. 

[37] James M. Poterba, "Impact of Population Aging on Financial Markets 
in Developed Countries," Economic Review (Kansas City: Federal Reserve 
Bank of Kansas City, 2004). 

[38] The proportional effect of a 0.5 percent decline in annual return 
would be smaller if the baseline level of the return was higher, but 
the absolute effect in terms of dollars would be larger. 

[39] K. M. Lim and D. N. Weil, "The Baby Boom and the Stock Market 
Boom," Scandinavian Journal of Economics, vol. 105, no. 3 (2003). 

[40] The study concludes that baby boomers will be better off than 
their parents and children in terms of their lifetime consumption, 
because asset returns rise during their working years and because they 
have relatively fewer children, boosting their ability to save early 
on. Robin Brooks, "Asset-Market Effects of the Baby Boom and Social- 
Security Reform," American Economic Review, vol. 92, no. 2 (2002). 

[41] The study's simulation model predicted that demographic changes 
accounted for around half of the variation between the highest and 
lowest stock prices. John Geanakoplos, Michael Magill, and Martine 
Quinzii, "Demography and the Long-Run Predictability of the Stock 
Market," Cowles Foundation Paper No. 1099 (New Haven, Conn.: Cowles 
Foundation for Research in Economics, Yale University, 2004). 

[42] A study exploring the implications of the assumption found that 
financial asset returns in Germany would fall by about 1.4 percentage 
points if baby boomers were only allowed to buy and sell assets 
domestically, but would fall by about 1 percentage point if the 
country's economy were open to international financial flows. See Axel 
Börsch-Supan, "Global Aging: Issues, Answers, More Questions," Working 
Paper WP 2004-084, University of Michigan Retirement Research Center 
(2004). 

[43] Swee Sum Lam and William Wee-Lian Ang "Globalization and Stock 
Market Returns," Global Economy Journal, vol. 6, no. 1 (2006). 

[44] For example, a recent study estimated based on a survey that about 
7 million previously retired U.S. individuals have returned to work for 
pay, representing almost one-third of the retirees. See Brightwork 
Partners, LLC, The Working Retired, a study prepared for Putnam 
Investments (Boston: 2005). 

[45] See, for example, Monika Bütler and Philipp Harms, "Old Folks and 
Spoiled Brats: Why the Baby-Boomers' Savings Crisis Need Not Be That 
Bad," Discussion Paper No. 2001-42, CentER (2001). The researchers 
found that the effect of a baby boom on asset prices could be dampened, 
in part by the early retirement of baby-boom parents and the late entry 
of the baby-boom children into the labor force. 

[46] Although the extent to which investors are forward-looking is an 
important factor in determining the current and future impact of 
demographic change on financial asset prices, the degree of foresight 
is open to question. See, for example, Stefano DellaVigna and Joshua M. 
Pollet, Attention, Demographics, and the Stock Market (Department of 
Economics, University of California, Berkeley: 2003 mimeographed). 

[47] The overall impact of immigration becomes more ambiguous when 
considering the federal government's budget. Immigration will boost tax 
revenues but also can increase outlays for transfer programs related to 
health, education, and welfare if the immigrating cohort is less- 
skilled. See, for example, Ronald Lee and Timothy Miller, "Immigration, 
Social Security, and Broader Fiscal Impacts," The American Economic 
Review, vol. 90, no. 2 (2000). 

[48] See appendix II for a list of the studies that we reviewed. 

[49] See, Steven M. Bergantino, "Life Cycle Investment Behavior, 
Demographics, and Asset Prices," (Ph.D diss., Massachusetts Institute 
of Technology, 1998); 
Robin J. Brooks, "Asset Market and Savings Effects of Demographic 
Transitions" (Ph.D diss., Yale University, 1998); 
E. Phillip Davis and Christine Li, "Demographics and Financial Asset 
Prices in the Major Industrial Economies," Working Paper (Brunel 
University, West London: 2003); 
and Geanakoplos, Magill, and Quinzii (2004). 

[50] Peter S. Yoo, "Age Distributions and Returns of Financial Assets," 
Working Paper 1994-002A (St. Louis: Federal Reserve Bank of St. Louis, 
1994), and James M. Poterba, "The Impact of Population Aging on 
Financial Markets," Working Paper No. 10851 (Cambridge, Mass.: National 
Bureau of Economic Research, 2004). 

[51] Diane Macunovich, "Discussion of Social Security: How Social and 
Secure Should It Be?", Social Security Reform: Links to Saving, 
Investment, and Growth, Steven Sass and Robert Triest, eds. (Boston: 
Federal Reserve Bank of Boston, 1997). While the study found evidence 
that a decrease in the 45-year olds increased stock returns, it also 
found evidence that an increase in the 66-year old population reduced 
stock returns, leaving the aggregate effect of the baby boom retirement 
on stock returns unclear. 

[52] We arrived at our estimates in several stages. First, we used U.S. 
Census Bureau data to calculate the demographic variables in each study 
from 1948 to 2004. Second, we multiplied the demographic regression 
coefficients in each study by their appropriate demographic variables 
for the period from 1948 to 2004. Third, to estimate the relative 
impact of the baby boomers on stock returns from 1986 to 2004, we 
subtracted the average annual impact on stock returns from 1948 to 1985 
(a period of relative stability in the middle age population) from the 
average annual impact on stock returns from 1986 to 2004 (a period of 
rapid growth in the middle age population). 

[53] In their simulation-based model, the researchers used as their 
demographic variable the ratio of the U.S. population age 40 to 59 to 
the U.S. population age 20 to 39. In their empirical analyses, they 
modified their demographic variable, in our view, without an economic 
rationale to capture more of the variation in stock returns, switching 
to the ratio of the population age 40 to 49 to the population age 20 to 
29. By choosing the demographic variable purely on the basis of 
statistical association, the change likely biased their estimated 
effect upward. Also, the study's demographic variable is projected to 
fluctuate much less in the future, suggesting that upcoming demographic 
changes will have less of an impact on stock returns. A researcher 
estimated that the projected changes in the study's demographic 
variable from 2000 to 2050 would result in a 0.60 percentage point 
decline in annual real returns. 

[54] The interest payment a borrower makes on a bond is typically 
fixed, so an increase in the bond's price reduces the fixed payment as 
a proportion of the bond's price and, thus, reduces the bond's yield. 

[55] These studies, however, found statistical evidence suggesting that 
the past increase in the middle age population has decreased returns on 
"Treasury bills," or short-term bonds. This finding suggests that the 
projected decrease in the middle age population will increase Treasury 
bill returns. 

[56] While it may not be in the interest of the financial industry to 
make alarming projections about the baby boom retirement, mutual fund 
companies and broker-dealers we interviewed offer stock funds, bond 
funds, annuities, and international stock funds. As a result, they have 
a broad range of products to offer workers and retirees in the event 
that they become concerned about the risks of a particular asset class 
or country. 

[57] These studies include, for example, Geanakoplos, Magill, and 
Quinzii (2004), Poterba (2004), and Davis and Li (2003). 

[58] See appendix IV for a complete description of our statistical 
model and results. 

[59] Industrial production is the output of U.S. manufactured goods, 
mines, and utilities. Its growth rate is highly correlated with gross 
domestic product, a broader measure of the economy's output. While 
labor force growth should influence growth of the overall economy, 
including industrial production, we believe that the significance of 
industrial production in our model is driven primarily by changes in 
industrial production related to business cycle fluctuations. 

[60] Participation in DB plans is typically much higher in the public 
sector. For 1998, the latest year for which data are available, 90 
percent of state and local government workers participated in a DB 
plan. 

[61] While this trend may partially reflect that older workers are more 
likely to have pension coverage than younger workers, the shrinking of 
DB plans and the aging of its participant pool are well-established and 
likely to continue. 

[62] One study by the Investment Company Institute found that 32 
percent of DC participants chose an annuity upon taking benefits. See 
Investment Company Institute, Defined Contribution Plan Distribution 
Choices at Retirement: A Survey of Employees Retiring Between 1995 and 
2000 (Washington, D.C.: Fall 2000). A 2003 GAO study found a much lower 
incidence, with fewer than 10 percent of DC participants choosing to 
annuitize upon retirement (see GAO-03-810). As of 2000, about 38 
percent of DC plans offered the option of receiving benefits as an 
annuity. 

[63] We calculated annuity equivalents using the annuity calculator 
from the Thrift Savings Plan (www.tsp.gov), assuming an interest rate 
of 5.5 percent, single life benefits beginning at age 65, no joint 
survivor benefits, and level payments. 

[64] Cash consists of assets in checking, savings, and money market 
accounts, certificates of deposit, and U.S. Savings Bonds. Savings 
consists of assets held outside of an employer-sponsored retirement 
plan and invested in IRAs, Keogh plans, mutual funds, annuities, 
trusts, managed accounts, and publicly traded stocks and bonds. 
Pensions consist of assets held in an employer sponsored account type 
pension plan, such as a 401(k) or 403(b) plan; 
defined benefit pensions are not included. Other assets not falling 
within the categories defined above include business and investment 
real estate interests, collectibles of value, and jewelry. 

[65] According to the 2004 SCF, about half of retirees receive at least 
half of their income from Social Security. For those in the lowest 60 
percent of the income distribution, these benefits make up over three- 
quarters of their total income. For all retirees, Social Security 
accounts for about 40 percent of their total retirement income. See GAO-
05-193SP. 

[66] Individual accounts would also try to increase revenues, in 
effect, by providing the potential for higher rates of return on 
account investments than the trust funds would earn under the current 
system, but this exposes workers to a greater degree of risk. Some 
proposals would create individual accounts without reducing promised 
benefits or increasing payroll taxes, relying instead on compensating 
decreased government spending, increased revenues, or increased 
borrowing from the public. Note that individual accounts would 
generally not by themselves achieve solvency for the Social Security 
system. Achieving solvency requires more revenue, lower benefits, or 
both. See GAO, Social Security Reform: Considerations for Individual 
Account Design, GAO-05-847T (Washington, D.C.: June 23, 2005). 

[67] See Richard W. Johnson and Rudolph G. Penner, "Will Health Care 
Costs Erode Retirement Security?" Issue in Brief (Boston: Center for 
Retirement Research at Boston College, 2004, No. 23.) 

[68] GAO, Highlights of a GAO Forum: The Federal Government's Role in 
Improving Financial Literacy, GAO-05-93SP (Washington, D.C.: Nov. 15, 
2004). At this forum, experts suggested that the federal government 
should not make financial literacy a national priority but should play 
a supportive role, given that a wide array of state, local, nonprofit, 
and private organizations provide financial education. 

[69] See John Hancock Financial Services, Defined Contribution Plan 
Survey: Insight into Participant Investment Knowledge and Behavior, 
2002. 

[70] Sarah Holden and Jack VanDerhei, "401(k) Plan Asset Allocation, 
Account Balances, and Loan Activity in 2004," EBRI Issue Brief #285 
(September 2005.) 

[71] This figure includes only those plans in which Vanguard serves as 
the manager. Vanguard Corporation, How America Saves 2005: A Report on 
Vanguard 2004 Defined Contribution Plan Data (Valley Forge, Penn.: 
October 2005). 

[72] See Arthur B. Kennickell, "Currents and Undercurrents: Changes in 
the Distribution of Wealth, 1989-2004," SCF Working Papers, June 22, 
2006. 

[73] From our literature review, studies that found evidence of a 
relationship between demography and stock returns include Robin J. 
Brooks, "Asset Market and Savings Effects of Demographic Transitions," 
Ph.D diss., Yale University (1998); 
E. Phillip Davis and Christine Li, "Demographics and Financial Asset 
Prices in the Major Industrial Economies," Working Paper (Brunel 
University, West London: 2003); 
and John Geanakoplos, Michael Magill, and Martine Quinzii, "Demography 
and the Long-Run Predictability of the Stock Market," Cowles Foundation 
Paper No. 1099 (New Haven, Conn.: Cowles Foundation for Research in 
Economics, Yale University, 2004). While Davis and Li include a set of 
control variables, Brooks' international approach captures only a 
global business-cycle component. Geanakoplos, Magill, and Quinzii do 
not include control variables. 

[74] James M. Poterba, "The Impact of Population Aging on Financial 
Markets," Working Paper No. 10851 (Cambridge, Mass.: National Bureau of 
Economic Research, 2004). 

[75] Peter S. Yoo, "Age Distributions and Returns of Financial Assets," 
Working Paper 1994-002A (St. Louis: Federal Reserve Bank of St. Louis, 
1994). 

[76] Eugene Fama, "Stock Returns, Expected Returns, and Real Activity," 
Journal of Finance, vol. 45, no. 4 (1990). 

[77] A Chow test confirms that there are no structural breaks around 
the midpoint (1976) in any of the regressions, but there is probably a 
structural break after 1980 in the baseline (Fama) regression 

[78] See Fama (1990). 

[79] See Brooks (1998), Davis and Li (2003), and Geanakoplos, Magill, 
and Quinzii (2004). 

[80] See Fama (1990). 

[81] By including the variables in this order, we are measuring the 
contribution of demographics to the R-squared after controlling for 
macroeconomic and financial variables. We replicated the results 
instead including the demographic variables first, and found that they 
accounted for even less of the variation in stock returns, around 1.8 
percent on average, compared to an average of roughly 5.7 percent when 
macroeconomic and financial variables were included first. 

[82] The presence of serial autocorrelation or deviations from 
normality would imply that the methods we used to measure statistical 
significance (e.g., p-values) were inappropriate, and could thus lead 
to incorrect conclusions about the strength of relationships between 
variables. 

[83] Changes in the "MY" ratio were used by Geanakoplos, Magill, and 
Quinzii (2004).  

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