Market watchers fret about boomers

John J. Marotta, a 57-year-old attorney who lives in the New York borough of Queens, plans to retire sometime between the ages of 67 and 70.

Once he does, his financial plan calls for him to sell off his stocks and bonds over a period of about 20 years. ''I'm self-employed and my wife is self-employed, so we will have to live on Social Security and what we have invested," said Marotta, whose retirement portfolio is 80 percent in stocks.


Although such a strategy may help people such as Marotta support themselves after they quit work, Wall Street trend watchers increasingly are asking whether it will erode support for a long-term rise in stocks.

Marotta is on the leading edge of the 79 million-person generation born in the United States between 1946 and 1964 that has caused major social and economic changes as it grew to adulthood.


Many experts say the boomers' faith in stocks as the best way to invest for retirement was one factor that helped create the greatest bull market in history between 1982 and 2000.

Now, as the eldest boomers begin nearing retirement age - they will be 62 in 2008 - some experts are worried that the generation's affection for stocks may turn out to be a double- edged sword. Some say the next generation, which numbers 10 million fewer than the boomers, will be unable to absorb all the investments sold by retirees, causing prices to fall. That would reduce the chances of a lasting upturn in the stock market, which began rising again last year after a three-year slump.

Jeremy Siegel, an economist at the University of Pennsylvania's Wharton School, became the Pied Piper for the late-20th century bull market with his 1994 book, Stocks for the Long Run, which showed that over long periods, stocks have done much better than other investments. Now, however, he sounds more like the Grim Reaper.

"Who's going to buy the assets of the baby boomers?" Siegel asked in a recent speech to securities industry executives. He argued that the smaller cohort of workers behind the boomers won't be able to produce as many goods and services as their predecessors did, making their overall wealth insufficient to buy all the securities being sold by retiring boomers unless prices for financial assets fall.

A number of analysts disagree with Siegel, saying that baby boomers will sell their assets so gradually, and their retirements will be spread over so many years, that the market effects will be small. They also point out that, although the rest of the industrialized world has an aging labor force, developing countries have large populations of young people. With the size of the working population in the United States falling, those emerging nations may end up selling large amounts of goods and services to this country, allowing them to increase their purchases of U.S. securities, the optimists say.

Siegel held out such a possibility in his speech, but said the massive transfer of capital ownership that would have to occur would cause "a huge shift in the global power structure."

Although Siegel has been warning for a while now that baby-boom retirements could hurt capital prices, a number of other analysts have begun echoing similar concerns. They include Robert Arnott, chairman of First Quadrant, a Pasadena, Calif.-based financial adviser, and Anne Casscells, managing director of Aetos Capital LLC, a San Francisco-area investment management firm. The two published a study in March 2003 predicting that increased life expectancy will worsen any downturn in securities prices as boomers knock off from work.

Average U.S. life spans will have lengthened nearly 15 years between 1940 and 2010, Arnott and Casscells said, and, as a result, the ratio of nonworkers to workers will climb nearly twice as high as it has ever been because of boomers' retirements.


Because of that increased "dependency ratio," they said, workers will have even fewer dollars available to buy stocks and bonds, and financial markets could stagnate for about a quarter century.

A study by three finance professors published in August 2002 predicted that, although the stock market might rally now and then, demographic factors could send its overall direction downward for quite a while.

Research by John Geanakoplos of Yale, Michael McGill of the University of Southern California and Martine Quinzii of the University of California-Davis showed that earlier downward cycles in the U.S. financial markets were related to the small relative number of middle-age working people - who are the most likely to invest in stocks - in the populations at those times.

A number of other economists, however, predict that any market disturbance caused by baby-boom retirements will be relatively mild.

John B. Shoven, a Stanford University economist, said that, at worst, baby boomers' retirements might cause stock returns to be only half a percentage point less over the next 30 years than they would be otherwise. He predicted that many boomers will hold on to their assets in order to collect interest and dividends.