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14 of 15 people found the following review helpful:
5.0 out of 5 stars
Good review of the impact of global aging on the financial m, August 8, 2003
This review is from: Global Aging and Financial Markets: Hard Landings Ahead (CSIS Significant Issues Series) (Paperback)
The author reviews numerous economic forecasts measuring the impact of global aging on the financial markets. Global aging is a looming major macroeconomic event. The huge baby boom generation will start retiring in 2011. By 2025, the entire baby boom generation will have retired. During this period, the baby boomers will be drawing down on their pension and retirement funds. The baby boomers draw downs will put huge downward pressure on bonds and stocks prices. Pension funds will experience rising negative cash flows as their benefit claims will surpass their contributions. In the U.S. for defined benefit pension plans, Schieber and Shoven forecast that the gap between benefit claims and contributions will deepen from - 1.5% of payroll in 2040 to - 4% in 2065. Regarding precise equity return outlook there is little consensus. The study from Schieber and Shoven forecasts that real equity returns will decline from an historical 8% down to 5%. Another study by Jan Mantel from Merrill Lynch claims that equities will not decrease in price throughout the retirement of the baby boomers. But, he did not express by how much equity returns would decline if equity prices grow at a slower than historical rate. Other economists forecast worse scenarios including bear markets lasting decades. There are three factors that will negatively affect equities. The first one, as mentioned, is the baby boomers selling their stock holdings throughout their retirement years. The second one is the pension funds changing their investment mix away from equities towards bonds and cash to meet upcoming liabilities associated with retirees. Mantel forecasts that between 2000 and 2050 pension funds will reduce their equity allocation from 72% to 60% of investments in the U.K, from 63% to 54% in the U.S., from 45% to 30% in the Netherlands, and from 40% to 28% in Japan. Because these four countries account for 80% of the World's private defined benefit pension assets, this shift in investment mix will represent a huge downward pressure on equity prices. The third factor is an anticipated increase in worldwide interest rates associated with a rapid increase in government borrowing through the industrialized World to support government retirement systems and elders healthcare benefits. Governments worldwide are ill prepared for the funding of these liabilities. Roseveare, an OECD economist, predicts government debt will reach staggering levels by 2030, and represent 339% of GDP in Japan, over 200% throughout the EU, and 115% in the U.S. These debt levels are a multiple of current levels. Reviewing the investment outlook for the second quarter of this century (2025 to 2050), we derive the following: 1) Equity prices and returns will be affected by a decrease in demand;
2) International equities should fare worse than U.S. ones because both the EU and Japan have more rapidly aging population and have weaker fiscal position associated with higher government debt level;
3) Bond prices and returns will be affected by a staggering increase in supply due to rising government debt. International bonds will be more vulnerable for the same reason as for equities;
4) Real estate will be affected by a declining demand associated with lower demographic growth and lower rate of household formation;
5) All medium to long term investments will be affected by a rise in real interest rates associated with a huge increase in government borrowing throughout the industrialized World to support government programs aimed at retirees. There are several moderating factors that may reduce the impact of global aging. However, these arguments are not convincing. The first one is that all the above predictions regarding pension plans are associated with defined benefit plans where a pension fund pays a predetermined annuity to retirees. Apparently, the more modern defined contribution plans (401K) would have a different and more robust cash flow than defined benefit plans. Retirees would not draw down on their 401K holdings as quickly. This makes sense, but the dollar amounts in defined contribution plans worldwide is small compared to defined benefit plans. The most intriguing economic argument that would counteract the negative impact of global aging relates to equities demand and supply equilibrium. If equities prices decline because of global aging, the cost of equity capital will go up for corporations. As a result, corporations will issue less equity and instead finance growth with bonds. Thus, the supply of equity will decrease and match the reduced demand for equity. And equity returns and prices ultimately will not be affected by global aging. Unfortunately the demand and supply equilibrium argument is flawed. The reduction in equity supply, as depicted, will be minimal compared to the reduction in equity demand associated with pension funds selling equities both to meet retirees benefits and to shift their portfolio mix towards bonds. Also, for corporations to steadily finance their growth through bond financing will further jack up real interest rates. This is due to increasing bond supply and increasing the credit risk premium on corporate bonds. This increase in real interest rates will hurt both bonds and equities.
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1 of 2 people found the following review helpful:
2.0 out of 5 stars
Fad of the moment/ Hype/ Tempest in Teapot, December 20, 2005
This review is from: Global Aging and Financial Markets: Hard Landings Ahead (CSIS Significant Issues Series) (Paperback)
I fully adopt as my own the review by A. Agarwal (Houston, TX USA), who is right on the money.
The problem with these neo-Malthusian arguments is that they are essentially trying to linearize a non-linear problem (economics). This does not work due to exogenous shocks, the same reason Malthus's theory doesn't work (technological innovation, which is unpredictable, increases food faster than population growth). Jeremy Siegel explains in The Future for Investors how Global Aging will not result in economic collapse (India will buy America's assets). And contrary to what the Gaetan Lion reviewer says, here is a 'thought experiment' (not unlike what is done in this book) why a large population is essential (an argument made by Singapore Prime Minister Lee several years ago): genius is a function of population: the more people, the greater likelihood a genius will be found. So grow a lot of people and some Einstein will invent a solution to every one of our problems, including aging (reversing the biological clock). Still not convinced? Then consider the titles of these two books below, from a noted think tank (Inst. for Intl Econ), and note the dates. Point being, these problems of yesteryear have not materialized.
"The US - Japan Economic Problem" by Bergsten and Cline 1985
"Deficits and the Dollar: The World Economy at Risk" Marris (1987).
Doomsday books sell--but check out the Hoover Institute's "10000 Years of Economic Crisis" to see why they rarely come to fruition.
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1 of 3 people found the following review helpful:
5.0 out of 5 stars
Global Aging - Rush to judgment, August 3, 2004
This review is from: Global Aging and Financial Markets: Hard Landings Ahead (CSIS Significant Issues Series) (Paperback)
Those truely interested in the impact of global aging on the price of financial assets, should heed to the insightful views of Jeremey Siegel, Wharton Finance.
I think a topic that is inadequately emphasised by most authors, are the demographic trends in the "rest" of the world, most notably, China and India, with their young and growing working age populations. We know the fate of many mega-trend predictions, including Malthusian population theory.
The focus of the debate on demographic challenges in the case of financial assets, unfortunately, is often heavily weighted towards inter-generational transfer of ownership within a country, or within the "developed" world. The emerging purchasing power of the developing countries either doesn't find a mention, or is written off as too insignificant.
Proliferation of communication and free trade is changing the world in profound ways. Many countries, people, and poulations are increasingly bridging the productivity and the knowledge gap, a fundamental cause of low incomes, for the upper quartile of their populations. These 300 to 500 million people are likely to move up the value chain and reach the "best practice" levels of productivity, in the next 20 to 25 years. The lower quartiles will follow, longer-term (50 to 90 years).
This trend will be a great shock absorber. The ownership of developed country assets will likely have a distinct inter-generational, and global characteristic.
Summary: The challenge exists. A crisis isn't imminent.
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