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Boomers cashing out could crash stock market -- Page 2

A market crash, a different cause
Laurence Kotlikoff, professor of economics at Boston University and co-author of "The Coming Generational Storm," does not foresee a big sell-off of stocks when boomers retire. He sees other boomer-related demographic problems with serious fiscal implications that threaten to bankrupt the country, but a big sell-off of stocks at our retirement? Nah.

Because of the 18-year spread between the youngest and oldest boomers, the process of selling equities will take place over decades. "The demographics are occurring gradually, so you wouldn't expect anything to happen overnight," he says.

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His major concern is the effect of demographic imbalances on the big social programs.

  • America is going to look a lot like Florida, he says, as the age 65-plus population doubles, but the under-65 population rises by only 18 percent.
  • In 1950, the ratio of workers to each Social Security beneficiary was 16.5-to-1. In 2000, it was 3.4-to-1. Between now and 2030, the ratio will fall to about 2-to-1.
  • This demographic shift threatens the sustainability of the major social programs: Social Security, Medicare and Medicaid. Compared to these programs, the national debt is a mere sideshow.
  • Medicare is the largest unfunded liability -- roughly six times larger than that of Social Security.
  • America's political leadership, over the past several decades, has done little to address the problem and everything in its power to hide the ugly truth from the people.
  • The ugly truth can be calculated by subtracting projected future government expenditures from future government receipts in present-value terms, says Kotlikoff.
  • Here's the ugly truth: We have a fiscal gap of $65.9 trillion, according to the most recent calculations by economists Jagadeesh Gokhale and Kent Smetters, who use the government's numbers to do the math.

The way things stand now, the less populous, younger workforce -- our X, Y and Z generations -- will have to shoulder the burden of these social programs by paying onerously higher taxes unless a solution is put into place soon. In a recent article called "The New New Deal" in The New Republic (registration required), he and co-author Niall Ferguson present some pretty radical solutions to the problem, including the elimination of income and FICA taxes, but the implementation of a 33-percent sales tax.

Big bond sell-off, big crash
So what does this have to do with the stock market? Kotlikoff believes it's quite vulnerable to a crash. Here's how it could happen: The Chinese and Japanese governments, which are big buyers of U.S. debt, could suddenly wake up to our fiscal imbalance and decide not to show up at the next Treasury auction. They might figure that the only way the U.S. government can make good on its debt is by printing money, which of course would drive up inflation, which would lessen the value of their bonds.

"At that point, just from one minute to the next, they'll sell the bonds and that will depress bond prices and raise interest rates," says Kotlikoff. "And it could raise them dramatically. Now, if long-term rates were to rise from around 4 or 5 percent to 10 percent from one day to the next, the stock market would crash," he says.

But that won't happen, right?

"I think that will happen," he says adamantly. "I think that's much more likely than some big boomer sell-off."

Let's all hope he's wrong.

 
 
-- Posted: Aug. 24, 2005
     

 

 
 

 

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