21 June 2015

This is a Feature, Not a Bug

You are no doubt aware of how proposals for tax advantaged retirement programs, the IRA, 401(k), the 403(b), etc., have been sold.

We have been told that by allowing retirement funds to engage a the markets, higher returns can be achieved, and thus provide for a more secure retirement.

In the process, trillions of dollars have flowed into stock and other financial markets, resulting in, as the laws of supply and demand indicate, significant appreciation in asset values.

Of course, at some point, people have to retire, and at that point, they have to cash in their assets.

What happens when those trillions of dollars leave the markets.

This is going to get ugly:
This morning the Wall Street Journal ran a story which showed that 2013 was the first year in decades that there was a net outflow from 401(k) plans. The immediate reaction by many was that this is just the start of a mass exodus from the markets by retiring baby boomers, which could have huge implications on the markets in the coming years as we patiently wait for Millennials to pick up the slack with their savings in the 2020s.


One of the things I’ve learned over the years is that demographics play a huge role in shaping the economic landscape from everything to the unemployment and labor force participation rates to the buying habits in the real estate market to economic growth (see Calculated Risk on why 2% growth is the new 4% growth for more on this). People are quick to blame or shower praise on politicians when it comes to the booms and busts we see in the economy. More often than not, the economic success or failure of those politicians has more to do with lucky timing in regards to where we happen to be in the economic (or demographic) cycle.

So while demographics does play a large role in shaping economic growth, it’s difficult to say how the mass exodus from the workforce by baby boomers is going to affect the financial markets. It probably comes down to investor behavior more than anything. It’s fairly easy for models to predict how the demographics will play out in the U.S. and abroad in the coming years. It’s not so easy to model out how investors will react to those changing demographic profiles.
This guy is a lot more sanguine about this than I am.

Of course, Wall Street gets paid when you invest, and when your money sits there, and when you pull your money out, so the parasitic financial class will be just fine, it's just the rest of us who will end up asking, "Do you want fries with that?" for the rest of our lives.


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