Data and Research

Global Retiree Boom Shapes Efficient Investment Frontier

As the supply of savings rises relative to demand, the “market-clearing return” on savings declines.

By John Manganaro | May 09, 2017
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A new analysis from the Center for Retirement Research at Boston College examines the impact the ballooning number of retirees could have on the U.S. and global economy—and by extension on stock markets and asset management strategies.

As readers will know, CRR finds the “transition to an older society in the U.S. is primarily driven by the aging of the Baby Boomer generation and the drop in fertility that has resulted in little or no increase in the size of subsequent cohorts. As a result, the ratio of retirees to the working-age population in the United States will grow rapidly through the middle of the century and more slowly thereafter as life expectancy continues to rise.”

What readers may not be aware of is just how widely this trend will apply—well beyond the borders of the U.S. According to CRR’s findings, “the transition is global, beginning sooner in Japan and Western Europe and later in China and most other developing nations.” It stands to reason that such a fundamental shift in age demographics will dramatically influence economic conditions and investment opportunities.

“The long-term effect of this demographic transition on U.S. investment returns depends on how it affects the supply and demand for savings in the ‘real’ economy,” CRR anticipates. “This effect includes demographic changes in other nations that result in capital flows to and from the U.S. market.”

CRR’s high-level projection is that, should the supply of savings rise relative to demand, “the market-clearing return on savings declines—investors would receive less income from interest, dividends, or profits for each dollar invested. Alternatively, if the supply of savings declines relative to demand, savings can be invested in opportunities that offer higher returns.”

It is one thing for investors to be aware of these long-term market pressures, and quite another to know what to do with such information in the short- and medium-term. As CRR acknowledges, it is important to understand that transient capital gains and losses will not be driven by these effects in the short- and medium term. 

NEXT: Demographics and market returns