Ageing, Savings, and Financial Markets

The three topics listed in this entry title are the source of much debate at the moment in academic and institutional circles. There is a good reason for this since the global process of ageing in the developed world will effect (dis)-savings and asset accummulation behavior which again will effect financial markets and asset prices. The key is to find how this development will play out and how institutions and economies should adopt. One of the prominent discourses on this topic revolves around the notion of rapid dis-savings and the effects of a process of rapid dis-savings as the world's baby boomers retire. This would then entail, according to some, a financial market meltdown as pension funds attempt to realize their assets all at once. But is this really a plausible scenario?

I think not and neither does Mr Erkki Liikanen governor of the Bank of Finland who in a recent speech at an international conference in Helsinki makes a whole lot of sense in m opinion in terms of how ageing will affect financial markets and in general how 'all this' will play out so to speak. Obviously it is difficult to say whether he is right or wrong but especially the differentiation levied on the rapid dissavings hypothesis is very important in my opinion.   

Here is the intro ...

Today, I'd like to discuss the importance of pension savings as a source of finance on the international financial markets. I will also take a look at the impact of changing population structure and pension reforms on the determination of real interest rates internationally. In that context, I shall also present estimation results of the Bank of Finland Dynamic General Equilibrium Model, which analyses the consequences of ageing for overall economic dynamics. 

Note also in particular this on the idea of rapid dis-saving ...

The impact that the retirement of the baby-boomers will have on the financial markets will be softened by at least three factors. In the first place, some commentators have drawn attention to the fact that pensioners' actual consumption behaviour does not seem to be the same as assumed in the models: pensioners do not realise their assets with anything like the speed the theoretical models would lead us to believe. 

I think this is an extremely important point since we really don't know and your standard asset accumulation model does indeed tend to predict dis-saving at a speed which does not seem reasonable. Another thing is the point about the 'two forces' which will shape savings in the future which also is very important to include in our calibrations. Clearly any general equilibrium model which promises to predict things in 2030 should of course be taken with a pinch of salt but the underlying assumptions are very much to the point I think ... 

Thus, global savings will in future be shaped by two opposing factors. On one hand, declining age cohorts will reduce the number of pension savers relative to the number of retired persons consuming previous savings. On the other hand, lengthening lifespans will make people of working age keener to save. The calculations conducted at the Bank of Finland suggest that this latter trend will be stronger, at least over the next couple of decades. Only around the year 2030 will the impact of declining age cohorts begin to dominate and depress the level of savings. Even then, the impact will be gradual and visible mainly as slower growth in new investment funds entering the financial markets, not a collapse in investment. 

(...)

To the list of factors increasing pension savings we can add another, more speculative motive. Attitudes towards retirement would appear to be changing. At one time people stopped working when their working capacity had declined so much that they could no longer work productively. But expectations have changed. People can increasingly look forward to many years of healthy life after retirement. Many now see their retirement years as an opportunity to enjoy their leisure time in a way that was impossible while they were at work. There appear to be rising expectations about consumption levels during retirement. An increasing readiness to consume in retirement also means an increasing need for pension savings. How large an impact this change in attitude will have on the financial markets is hard to assess, but the direction of the impact is surely clear. 

All in all I think this speech and the arguments it fields represents a very valuable contribution to the general discourse on financial markets and the effects of ageing. Also, you should note the macroeconomic analysis provided further on in the speech which also seems, in my opinion, right on the money when it comes to the (lack of?) effects of raising retirement age as well as the economic effects of a structural fiscal tightening process to pay for pay-go pension schemes.