United States Government Accountability Office

GAO Report to Congressional Committees

BABY BOOM 

GENERATION 

Retirement of Baby 

Boomers Is Unlikely 

to Precipitate 

Dramatic Decline in 

Market Returns, but 

Broader Risks 

Threaten Retirement 

Security 

July 2006 

 

GAO-06-718 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

July 2006

BABY BOOM GENERATION 

Retirement of Baby Boomers Is Unlikely 

to Precipitate Dramatic Decline in Market 

Returns, but Broader Risks Threaten 

Retirement Security 

Highlights of GAO-06-718, a report to 

congressional committees 

The first wave of baby boomers

(born between 1946 and 1964) will 

become eligible for Social Security

early retirement benefits in 2008. In

addition to concerns about how the 

boomers’ retirement will strain the 

nation’s retirement and health

systems, concerns also have been 

raised about the possibility for 

boomers to sell off large amounts 

of financial assets in retirement, 

with relatively fewer younger U.S.

workers available to purchase 

these assets. Some have suggested 

that such a sell-off could 

precipitate a market “meltdown,” a 

sharp and sudden decline in asset

prices, or reduce long-term rates of 

return. In view of such concerns,

we have examined (1) whether the

retirement of the baby boomers is 

likely to precipitate a dramatic

drop in financial asset prices; (2) 

what researchers and financial 

industry participants expect the 

effect of the boomer retirement to 

have on financial markets; and (3)

what role rates of return will play 

in providing retirement income in 

the future. We have prepared this

report under the Comptroller 

General’s authority to conduct 

evaluations on his own initiative as

part of the continued effort to

assist Congress in addressing these 

issues. 

. What GAO Recommends

GAO is not making any 

recommendations. 

Our analysis of national survey and other data suggests that retiring boomers 

are not likely to sell financial assets in such a way as to cause a sharp and 

sudden decline in financial asset prices. A large majority of boomers have 

few financial assets to sell. The small minority who own most assets held by

this generation will likely need to sell few assets in retirement. Also, most 

current retirees spend down their assets slowly, with many continuing to 

accumulate assets. If boomers behave the same way, a rapid and large sell 

off of financial assets appears unlikely. Other factors that may reduce the 

odds of a sharp and sudden drop in asset prices include the increase in life 

expectancy that will spread asset sales over a longer period and the 

expectation of many boomers to work past traditional retirement ages. 

A wide range of academic studies have predicted that the boomers’ 

retirement will have a small negative effect, if any, on rates of return on 

assets. Similarly, financial industry representatives did not expect the 

boomers’ retirement to have a big impact on the financial markets, in part 

because of the globalization of the markets. Our statistical analysis shows 

that macroeconomic and financial factors, such as dividends and industrial 

production, explained much more of the variation in stock returns from 1948 

to 2004 than did shifts in the U.S. population’s age structure, suggesting that 

demographics may have a small effect on stock returns relative to the 

broader economy. 

While the boomers’ retirement is not likely to cause a sharp and sudden 

decline in asset prices, the retirement security of boomers and others will 

likely depend more on individual savings and returns on such savings. This is 

due, in part, to the decline in traditional pensions that provide guaranteed 

retirement income and the rise in account-based defined contribution plans. 

Also, fiscal uncertainties surrounding Social Security and rising health care 

costs will ultimately place more personal responsibility for retirement saving 

on individuals. Given the need for individuals to save and manage their 

savings, financial literacy will play an important role in helping boomers and 

future generations achieve a secure retirement. 

Distribution of Baby Boomer Financial Assets, by Wealth Percentiles 

97% 

3% 

Bottom 50% of 

population 

by net wealth 

Top 50% of 

population 

by net wealth 0 

20 

40 

60 

80 

100 

Top 25 Top 10 Top 5 

Percentage of financial assets owned Percentage of financial assets owned 

Percentage of population 

Continued

breakdown

Source: GAO analysis of 2004 Survey of Consumer Finances

86 

68

52 

www.gao.gov/cgi-bin/getrpt?GAO-06-718.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Barbara 

Bovbjerg at (202) 512-7215 or 

bovbjergb@gao.gov. 
Contents 

Letter 1

Results in Brief 2

Background 4

Financial Evidence from Baby Boomers and Current Retirees Does 

Not Suggest a Sharp Decline in Asset Prices 7 

Researchers and Financial Industry Representatives Largely 

Foresee Little to No Impact on Financial Markets as the Baby 

Boomers Retire 21 

Baby Boomers and Future Generations Likely to Increasingly Rely 

on Their Own Savings, Placing Greater Importance on Rates of

Return and Financial Management Skills 31 

Concluding Observations 40 

Agency Comments 42 

Appendix I Scope and Methodology 45 

Appendix II Bibliography of Simulation-Based and Empirical 

Studies 47 

Appendix III Summary of the Simulation-Based and Empirical 

Studies Assessing the Impact of a Baby Boom on 

Financial Markets 50 

Appendix IV Econometric Analysis of the Impact of Demographics 

on Stock Market Returns 57 

Appendix V GAO Contact and Staff Acknowledgments 64 

Tables 

Table 1: Pension Coverage by Plan Design, 2004, as Percentage of 

Birth Cohort 32 

Page i GAO-06-718 Baby Boom Generation
Table 2: Simulation-Based Studies Assessing the Impact of a Baby 

Boom on Financial Markets 50 

Table 3: Empirical Studies Assessing the Impact of a Baby Boom 

on Financial Markets 54 

Table 4: Names, Definitions and Data Sources of Variables Used in 

Our Regression Models 59 

Table 5: Stock Market Returns Regression Results—Baseline 

Model 61 

Table 6: Stock Market Returns Regression Results—Middle Age 

Model 62 

Table 7: Stock Market Returns Regression Results—Change in 

Middle Age Model 62 

Table 8: Stock Market Returns Regression Results—Middle-Young 

Ratio Model 62 

Table 9: Stock Market Returns Regression Results—Change in 

Middle-Young Ratio Model 63 

Figures 

Figure 1: U.S. Elderly Dependency Ratio (Population Age 65 and 

Older Relative to Age 15 to 64), 1950-2000 and Projected 

2005-2050 6

Figure 2: Distribution of Baby Boomer Financial Assets, by Wealth 

Percentiles 9

Figure 3: Percentage of Baby Boomers Who Own Financial Assets 

and Their Use of Different Investment Accounts 10 

Figure 4: Total Financial Assets Held by Boomers and the Rest of 

the U.S. Population 11 

Figure 5: 2004 U.S. Resident Population, by Birth Year 17 

Figure 6: Share of the U.S. Population Age 65 and Older, Projected 

to 2050 18 

Figure 7: Labor Force Participation Rates for Americans, Ages 55 

and Older 20 

Figure 8: Sources of Stock Market Return Variation 30 

Figure 9: Individual Retirement Account and Defined Contribution 

Pension Balances for Older and Younger Baby Boomers, 

2003 34

Figure 10: Allocation of Assets of Baby Boomers, By Wealth 

Quartiles 36

Page ii GAO-06-718 Baby Boom Generation
Abbreviations 

DB defined benefit 

DC defined contribution 

EBRI Employee Benefit Research Institute 

HRS Health and Retirement Study 

IRA Individual Retirement Account 

S&P Standard & Poor’s 

SCF Survey of Consumer Finances 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page iii GAO-06-718 Baby Boom Generation
United States Government Accountability Office

Washington, DC 20548 

July 28, 2006

Congressional Committees 

The aging of the U.S. population is expected to present great fiscal and 

economic challenges in the decades ahead. The first wave of the baby 

boom generation, the 78 million Americans born between 1946 and 1964 

and alive as of 2005, will turn age 62 and become eligible for Social 

Security benefits beginning in 2008. The retirement of the relatively large 

baby boom generation, combined with other demographic trends, is 

expected to strain the nation’s retirement and health systems.1

 This 

impending event has also raised concerns about the potential market 

effect should baby boomers sell off large amounts of financial assets in 

retirement. If proportionally fewer workers are available to buy these 

assets, some market observers fear that the increase in supply of stocks, 

bonds, and other financial assets relative to demand may place downward 

pressure on asset prices. At the extreme, some observers have raised the 

possibility of a market “meltdown,” a sharp decline in stock or other asset 

prices, precipitated by the baby boom retirement. In contrast, others have 

noted that such an outcome could be mitigated by a rising demand for U.S. 

financial assets from developing countries and by immigration. 

Returns on investment are important in helping many Americans 

accumulate sufficient savings throughout their working lives to meet their 

retirement needs. From 1946 to 2004, U.S. stocks have returned an average

of 8.0 percent annually, adjusted for inflation. From 1986 to 2004, U.S. 10-

year Treasury notes have yielded an annual average of 3.4 percent, 

adjusted for inflation. Importantly, returns on financial assets provide 

retirement income for many Americans, accounting for 12.6 percent of 

total income for Americans age 65 and over in 2004, and over half of this 

cohort received some income from financial assets. If the baby boom 

retirement were to reduce asset returns, retirees would generate less 

income from investments and workers would have more trouble saving 

adequately for retirement. 

 1

 See GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: Feb. 1, 2005); 21st Century Challenges: Transforming 

Government to Meet Current and Emerging Challenges, GAO-05-830T (Washington, D.C.: 

July 13, 2005); and 21st Century: Addressing Long-Term Fiscal Challenges Must Include a

Re-examination of Mandatory Spending, GAO-06-456T (Washington, D.C.: Feb. 13. 2006).

Page 1 GAO-06-718 Baby Boom Generation
In view of such concerns, we have examined (1) whether the retirement of 

the baby boom generation is likely to precipitate a dramatic drop in 

financial asset prices; (2) what researchers and financial industry experts 

expect the effect of the baby boom retirement to have on the financial 

markets, and (3) what role rates of return will play in providing retirement 

income in the future. We have prepared this report under the Comptroller 

General’s authority to conduct evaluations on his own initiative as part of

a continued effort to assist Congress in addressing these issues. 

To analyze whether the retirement of the baby boom generation is likely to 

precipitate a dramatic drop in financial asset prices, we examined 

financial information from the Survey of Consumer Finances (SCF) to 

determine what financial assets are held by baby boomers and the Health

and Retirement Study (HRS) to determine how current retirees spend 

down their assets.2

 To identify the views of researchers and outside 

experts on the financial effects of the baby boom retirement, we reviewed 

simulation-based and empirical studies analyzing the baby boom 

generation’s impact on financial markets and interviewed financial and 

public policy experts from mutual fund companies, pension funds, life 

insurance companies, broker-dealers, financial planning organizations, and 

financial industry trade associations. We also conducted our own 

econometric analysis of the historical importance of demographics on 

financial asset returns. To assess the role rates of return will play in 

providing retirement income, we reviewed past GAO reports, academic 

literature, and obtained insights from interviews with outside experts. We 

conducted our work between August 2005 and June 2006 in accordance 

with generally accepted government auditing standards. A more extensive 

discussion of our scope and methodology appears in appendix I. 

Our analysis of national survey and other data suggests that baby boomers 

would be unlikely to sell enough financial assets in retirement to 

precipitate a market meltdown, or a sudden and sharp decline in asset 

prices. First, a large majority of boomers have few financial assets to sell, 

and the small wealthy minority that holds the large majority of this 

generation’s assets will likely need to sell little, if any, of their assets in 

Results in Brief 

 2

 The SCF is a nationally representative survey sponsored by the Federal Reserve Board

containing detailed information on assets and debt of U.S. households. We define baby

boomers in our analysis of SCF as a household headed by an individual born between 1946

and 1964. HRS is a nationally representative biennial survey of older Americans produced

by the University of Michigan and sponsored by the National Institute on Aging. 

Page 2 GAO-06-718 Baby Boom Generation
retirement.3

 Our examination of the 2004 SCF shows that the wealthiest 10

percent of boomers own about two-thirds of the financial assets held by 

this generation, excluding assets held indirectly in defined benefit (DB) 

pensions. About one-third of all boomers do not own any assets in stocks, 

bonds, mutual funds, or retirement accounts. Second, if baby boomers 

behave like current retirees, a rapid and large sell off of financial assets 

also appears unlikely. Our analysis of data on current retirees’ saving and

investment behavior reveals that most retirees slowly spend down their 

assets in retirement, with many actually continuing to accumulate assets. 

Other factors that would mitigate against a sharp and sudden decline in

asset prices include the 19-year span over which boomers will reach 

retirement age, the extended life expectancy of boomers, and the expected 

increase in boomer employment past traditional retirement ages, which 

would facilitate additional asset accumulation and reduce the need to sell

assets to provide retirement income. Finally, to the extent that boomers 

may be less reluctant than prior generations to treat their homes as a 

source of retirement income through such strategies as reverse mortgages,

they may also depend less heavily on selling their financial assets for 

income. 

Researchers and financial industry representatives largely expect the baby

boom retirement to have little or no effect on stock and bond markets. 

Studies that used models to simulate the market effects of a hypothetical 

baby boom followed by a baby bust generally predicted that the baby 

boom retirement will have a small, negative effect on financial asset 

returns. Similarly, most of the empirical studies, which statistically 

examined the impact of past changes in the U.S. population’s age structure 

on stock returns and bond yields, suggested that demographic shifts have 

had a minimal or no effect on stock returns or bond yields. In addition, 

financial industry representatives whom we interviewed generally did not 

expect the baby boomers to have a significant impact on the financial 

markets when they retire. They said factors that could slow the sale of 

assets or increase demand and thereby mitigate any demographic effect 

included the possibility that the minority of boomers who own the 

majority of financial assets will likely bequeath rather than sell their 

assets, boomers will hold stock well into retirement to hedge inflation and 

the risk of outliving their savings, and international factors such as 

 3

 We define financial assets as stocks, bonds (excluding U.S. savings bonds), mutual funds,

Individual Retirement Accounts, Keogh accounts, account-type retirement savings plans,

and assets in annuities, trusts, and managed accounts that are invested in stocks and 

bonds. 

Page 3 GAO-06-718 Baby Boom Generation
immigration and an increase in asset demand from developing countries. 

Finally, our statistical analysis indicates that macroeconomic and financial 

factors, such as dividends and industrial production, have explained more 

of the variation in stock returns from 1948 to 2004 than shifts in the U.S. 

population’s age structure—suggesting that such factors could outweigh 

any future demographic effect on stock returns. 

While the baby boom retirement is not likely to cause a sharp decline in

asset prices or returns, the retirement security of boomers and future 

generations will likely depend increasingly on individual savings and the 

returns these savings can earn. The decline in traditional DB pensions that 

provide income for life and their replacement with account-based defined

contribution (DC) plans mean that fewer boomers will have a dependable 

income during retirement other than that from Social Security. However, 

fiscal uncertainties about Social Security’s solvency may result in reduced

future benefits for certain age groups and income levels, thereby placing

more responsibility for saving on individuals. Collectively, these trends 

would increase the dependence of individuals on rates of return to 

accumulate enough financial assets at retirement and to produce sufficient 

income from their assets during retirement. Given the need for individuals 

to rely increasingly on their ability to manage their own accumulation and 

spending of assets and savings, financial literacy will likely play an ever 

important role in the retirement security of baby boomers and future 

generations.

In the 21st century, older Americans are expected to comprise a larger 

share of the population, live longer, and spend more years in retirement 

than previous generations. The share of the U.S. population age 65 and 

older is projected to increase from 12.4 percent in 2000 to 19.6 percent in 

2030 and continue to grow through 2050. At the same time, life expectancy 

is increasing. By 2020, men and women reaching age 65 are expected to

live another 17 or 20 years, respectively. Finally, falling fertility rates are 

contributing to the increasing share of the elderly population. In the 1960s, 

the fertility rate was an average of three children per woman.4

 Since the 

1970s, the fertility rate has hovered around two children per woman, 

meaning relatively fewer future workers are being born to replace retirees. 

The combination of these trends is expected to significantly increase the 

Background 

 4

 The fertility rate is the average number of children born to a woman between the ages 15 

to 44, among all women who survive to age 44. 

Page 4 GAO-06-718 Baby Boom Generation
elderly dependency ratio—the number of people age 65 and over in 

relation to the number of people age 15 to 64. In 1950, there was 1 person 

age 65 or over for every 8 people age 15 to 64. By 2000, the elderly 

dependency ratio had risen to 1 person age 65 for every 5 people of 

traditional working age, and by 2050 this ratio is projected to rise further 

to about 1 elderly to every 3 working age people (see fig. 1).5

Consequently, relatively fewer workers will be supporting those receiving

Social Security and Medicare benefits, which play an important role in 

helping older Americans meet their retirement needs. 

 5

 These demographic changes are not unique to the United States. Other developed 

countries are undergoing demographic change similar or greater in magnitude than the

United States. For example, the elderly dependency ratio for Italy and Japan is projected to

rise from around 1 person age 65 or over for every 4 people age 15 to 64 to around 1 older 

person for every 1.5 younger people from 2000 to 2050; Spain and Germany will also face a 

steeply rising dependency ratio over the same period. In comparison, the ratio for the

United Kingdom is expected to increase at a similar pace as the U.S. ratio. 

Page 5 GAO-06-718 Baby Boom Generation
Figure 1: U.S. Elderly Dependency Ratio (Population Age 65 and Older Relative to Age 15 to 64), 1950-2000 and Projected 

2005-2050 

0 

5 

10 

15 

20 

25 

30 

35 

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 

Percentage 

Source: United Nations.

Year 

Projected 

Note: Population Division of the Department of Economic and Social Affairs of the United Nations 

Secretariat, World Population Prospects: The 2004 Revision and World Urbanization Prospects: The 

2003 Revision. Data for 2005 through 2050 are projected. The elderly dependency ratio equals the 

number of people age 65 and older divided the number between age 15 and 64, expressed as a 

percentage. 

By causing a large shift in the U.S. population’s age structure, some have 

suggested that the baby boom generation may affect stock and other asset 

markets when this cohort retires. This concern stems from hypothetical 

spending and saving patterns over people’s lifetimes, which economists 

describe in the “life cycle” model. The model hypothesizes that people 

attempt to smooth their consumption over their lifetime. As individuals’ 

earnings typically grow over their working life, this suggests that younger 

workers, with relatively low earnings, may save relatively little or borrow 

to finance current consumption (or to buy a house); older workers may 

save significantly more in preparation for retirement; and retirees may 

spend down their savings. The model therefore predicts that the saving 

rate is hump-shaped over an individual’s lifetime.

Over the course of their lives, individuals make decisions about not only 

how much to save but also how to distribute their savings among a mix of

assets, such as stocks, bonds, real estate, and bank accounts. For example, 

older workers are expected to shift their portfolios toward less volatile 

Page 6 GAO-06-718 Baby Boom Generation
assets, such as bonds or cash accounts, because they will tend to prefer 

assets with a more predictable flow of income since they will have less 

time to weather potential price declines in riskier assets such as stocks. 

In addition to their saving and consumption patterns, baby boomers also 

may affect stock returns in particular through broader macroeconomic 

channels. Stocks represent claims on the profits earned by firms, and in 

the long run the returns on these assets should reflect the productivity of

the firms’ capital. Generally, economic theory states that capital becomes 

more productive with more and better quality labor to use that capital. 

Because the baby boom retirement is expected to reduce the growth rate 

of the U.S. labor supply, it may reduce returns to capital, which could 

reduce the returns to stocks. More generally, investors may price stocks in

relation to the underlying value of the firm, taking into account the value 

of firm’s current assets and stream of future profits. 

Our analysis of national survey data indicates that the baby boom 

generation is not likely to precipitate a sharp and sudden decline in 

financial asset prices as they retire. Our analysis of the 2004 SCF shows 

that just 10 percent of boomers own more than two-thirds of this 

generation’s financial assets, excluding assets held indirectly in DB 

pensions. These wealthiest boomers may be able to support themselves 

on the income from these investments without spending them down 

significantly. About one-third of all boomers do not own any stocks, 

bonds, mutual funds, or retirement accounts.6

 As with the prior generation, 

baby boomers may continue to accumulate financial assets in retirement 

and liquidate their assets only gradually with the hope of leaving bequests. 

The gradual entry of the boomers over a 19-year period into retirement 

should further reduce the likelihood of a sudden decline in asset prices.7

Further, boomers have indicated that they plan to retire later than 

generations that retired in the recent past, with almost half not planning to

leave full-time employment until age 65 or later. Many may also continue 

to work throughout retirement, reducing or delaying their need to sell 

financial assets. Housing represents a greater share of total wealth for 

most baby boomers than do financial assets, and therefore the housing 

Financial Evidence 

from Baby Boomers 

and Current Retirees 

Does Not Suggest a 

Sharp Decline in

Asset Prices 

 6

 In determining wealth for the purposes of this report, we added all assets that each 

household owns and subtracted all outstanding debts. 

7

 For purposes of this report, we consider people to be retired if they self-report they are 

retired in the SCF or HRS. We refer to full retirement as when an individual stops working

for pay altogether. 

Page 7 GAO-06-718 Baby Boom Generation
markets present more financial risk to most boomers than the financial 

markets. 

Concentration of Financial 

Assets among a Minority of 

Baby Boomers May Lessen 

Their Market Effect 

The potential for the baby boom generation to precipitate a market 

meltdown in retirement may be substantially reduced by the fact that a 

small minority of this population holds the majority of the generation’s 

financial assets. According to our analysis of the 2004 SCF, the wealthiest 

10 percent of boomers owned over two-thirds of the approximately $7.6 

trillion held by boomers in stocks, bonds, mutual funds, Individual 

Retirement Accounts (IRAs), and other account-type retirement savings 

plans in 2004. This wealthiest group held $1.2 million, on average, in these 

financial assets, plus over $2 million in other assets such as home equity 

and other investments.8

 Figure 2 shows the concentration of financial 

assets among boomers. This concentration of wealth is very similar to that 

of current retirees and could mitigate a sharp and sudden impact on 

financial asset prices if wealthy boomers need not spend down their 

financial assets in retirement. Research on current retirees indicates that 

the wealthiest of these individuals tend to not sell their financial assets, 

contrary to what the life-cycle model would predict; instead, they choose 

to live from the income these assets generate.

9

 Our analysis of the 2004 

SCF also found that of the wealthiest 10 percent of current retirees born 

before 1946, less than 16 percent spent money from their savings and 

investments over and above their income during the previous year. In this 

same group, over 65 percent responded that their income in 2003 

exceeded their spending, indicating that they had accumulated more 

assets without having a net sale from their holdings. 

 8

 Because DB pension plans are future income payments and not assets held in an account, 

they are not included in calculating financial assets or wealth with the SCF data. 

9

 Christopher D. Carroll, “Portfolios of the Rich,” National Bureau of Economic Research,

Working Paper No. 7826 (August 2000). 

Page 8 GAO-06-718 Baby Boom Generation
Figure 2: Distribution of Baby Boomer Financial Assets, by Wealth Percentiles 

97% 

3% 

Bottom 50% of 

population 

by net wealth 

Top 50% of 

population 

by net wealth 0 

20 

40 

60 

80 

100 

Top 25 Top 10 Top 5 

Percentage of financial assets owned Percentage of financial assets owned 

Percentage of population 

Continued

breakdown

Source: GAO analysis of 2004 Survey of Consumer Finances.

86 

68 

52 

Note: Financial assets include stocks, bonds, mutual funds, IRAs, Keogh plans, and other accounttype retirement savings plans. The distribution of baby boomers is based on total wealth, defined as 

the net of all assets that each household owns and all outstanding debts. 

The possibility of an asset meltdown is further reduced by the fact that 

those households that would seem more likely to need to sell their 

financial assets in retirement do not collectively own a large portion of the 

total stocks and bonds in the market. Although the majority of baby 

boomers hold some financial assets in a variety of investment accounts, 

the total holdings for all boomer households, $7.6 trillion, account for 

roughly one-third of the value of all stocks and 11 percent of bonds 

outstanding in the U.S. markets, and the wealthiest boomers own most of 

these assets (see figs. 3 and 4).10 Those households that are most likely to 

spend down their assets in retirement—those not in the top 10 percent by

wealth—collectively hold just 32 percent of all baby boomer financial 

assets. As a group, the influence of these households on the market is less 

substantial. One-third of this group does not own any stocks, bonds, 

mutual funds, or retirement accounts, and among those who do, their total 

holdings are relatively small, with their median holdings totaling $45,900.

 10 At the close of 2004, assets invested in the New York Stock Exchange and NASDAQ

totaled $16.1 trillion, and assets in domestic bonds, both corporate and government,

excluding money markets, totaled $20.7 trillion. 

Page 9 GAO-06-718 Baby Boom Generation
Figure 3: Percentage of Baby Boomers Who Own Financial Assets and Their Use of

Different Investment Accounts 

0 

10 

20 

30 

40 

50 

60 

70 

80 

90 

100 

Directly 

held 

bonds

Mutual 

funds

Directly 

held 

stock 

Defined IRAs

contribution

pension

Percentage 

Source: GAO analysis of 2004 Survey of Consumer Finances.

Asset type held

Total baby boomer households Assets held by baby boomer households

67%

33%

Do not own assets

Own assets

Page 10 GAO-06-718 Baby Boom Generation
Figure 4: Total Financial Assets Held by Boomers and the Rest of the U.S. 

Population 

6% 

14% 

29% 

50% 

Source: GAO analysis of 2004 SCF. 

Baby boomer bonds $2.36 

Baby boomer stocks $5.27 

Total U.S. equities held by 

the rest of the population 

$10.83

Total (dollars in trillions): $36.81 

Total U.S. bonds held by 

the rest of the population $18.35 

Assets held by baby boomers

Assets held by the rest of the population 

Note: Due to rounding, total does not equal 100 percent. 

Analysis of Current Retiree 

Behavior Reveals a Pattern 

of Continued 

Accumulation and Slow 

Spending of Assets 

Our analysis of national data on the investment behavior of current 

retirees reveals an overall slow spending down of assets in retirement, 

with many retirees continuing to purchase stocks. To the extent that baby 

boomers behave like current retirees, a rapid and mass sell off of financial 

assets seems unlikely.11 In examining retiree holdings in stocks, using 

biennial data spanning 1994 to 2004 from HRS, we found that many people 

continue to buy stocks in retirement. More than half of retirees own stocks 

 11 An important distinction between current retirees and baby boomers is that the latter are

more likely to rely on DC pensions for retirement income, which may affect how they 

spend down their assets. Research has shown that there is a lower propensity to spend 

assets from a DC plan when compared to income from a DB plan. While approximately 16 

percent of people older than baby boomers have DC pensions as part of their retirement

savings plan, about 42 percent of older boomers and 45 percent of younger boomers have 

DC pensions. A DB pension provides a guaranteed benefit usually in the form of an annuity, 

whereas a DC pension is an individual account whose value depends on contributions and

investment returns. Another difference is that benefits from DB plans are insured up to 

specified limits by the Pension Benefit Guaranty Corporation. 

Page 11 GAO-06-718 Baby Boom Generation
outside of an IRA, Keogh, or pension account and, among this group, 

approximately 57 percent purchased stocks at some point over the 10-year 

period in retirement.12 We found that from 2002 to 2004 the stock 

ownership for most of these retirees either increased or remained at the 

same level. Among those who owned stock, almost 31 percent reported 

buying stocks during this 2-year period, while just fewer than 26 percent 

reported selling.13 For the retirees who both bought and sold stocks, 

approximately 77 percent purchased at least as much value in stock as 

they sold.14

Additionally, although retirees might be expected to have a low tolerance 

for market risk and will therefore divest themselves of equities in favor of 

bonds, the SCF data does not suggest such a major reallocation.15

Comparing households’ holdings in stocks and bonds by age, we found 

only a small difference in aggregate stock and bond allocation across 

portfolios. Specifically, data from the 2004 SCF shows that of total wealth 

among households headed by people over age 70, more is invested in 

stocks than bonds.16 In 2004, households headed by those over age 70 had 

roughly 60 percent of their investments in stocks and 40 percent invested 

 12 This measure of stock purchases includes stock or money put into a mutual fund, 

including automatic reinvestments. 

13 This measure of stock sales and purchases does not include IRAs, Keoghs, or pension

accounts.

14 In addition, for investments in real estate (not including a primary residence) and private 

businesses, assets that few retirees hold, we found that the majority of retirees do not sell 

these assets off quickly. According to the HRS, approximately 22 percent of retirees owned

real estate and about 10 percent owned shares in a private business in 2004. These assets 

represented a significant share of net wealth among those retirees who held them—for 

retirees with both real estate and private business holdings, these combined assets 

represent, on average, about half of total wealth. However, from 1994 to 2004 time period, 

only about one-quarter of these retirees sold real estate and 8 percent sold an interest in a 

private business. 

15 While investments in equities are viewed to be a hedge against inflation and have higher

average returns than bonds, they are riskier investments compared to most bond 

investments, and therefore pose more of a risk of loss of value in the short run. A loss in 

portfolio value would be especially harmful to retirees, as they are less likely to be able to 

return to work to make up for a loss in wealth and they have a shorter time horizon to

recoup their losses in the market. 

16 Researchers similarly have found that the percentage of net worth invested in common 

stocks shows very little decline after age 60, with the share of net worth held as common 

stocks never falling below the percentage observed for 45 to 49 year-olds. See Barry P. 

Bosworth, Ralph C. Bryant, and Gary Burtless, “The Impact of Aging on Financial Markets

and the Economy: A Survey” (Washington, D.C.: The Brookings Institution, July 2004). 

Page 12 GAO-06-718 Baby Boom Generation
in bonds, while those households headed by someone aged 40 to 48 held

68 percent of their portfolios in stocks and 32 percent in bonds. 

Our finding that retirees slowly spend down assets is consistent with the 

results of several academic studies. One recent study that examined asset 

holdings of elderly households suggests there is a limited decline in 

financial assets as households age.17 Prior work also finds evidence that 

retirees spend down at rates that would leave a considerable portion of 

their wealth remaining at the end of average life expectancy and a 

significant number of retirees continue to accumulate wealth at old ages.18

For example, a 1990 study estimated that most single women would have 

approximately 44 percent of their initial wealth (at age 65) remaining if 

they died at the average age of life expectancy.19 Other studies have shown 

that over the last several decades the elderly have drawn down their lumpsum wealth at relatively conservative rates of 1 to 5 percent per year.20

Retirees may spend down assets cautiously as a hedge against longevity 

risk. Private annuities, which minimize longevity risk, are not widely held 

by older Americans.21 As life expectancy increases and people spend more 

years in retirement, retirees will need their assets to last a longer period of 

time and, thus, should spend them down more slowly. The average 

number of years that men who reach age 65 are expected to live has 

increased from 13 in 1970 to 16 in 2005, and is projected to increase to 17

 17 James Poterba, “The Impact of Population Aging on Financial Markets,” Working Paper 

No. 10851 (Cambridge, Mass..: National Bureau of Economic Research, 2004). 

18 Michael D. Hurd, “Research on the Elderly: Economic Status, Retirement, and 

Consumption and Saving,” Journal of Economic Literature, Vol. 28, No. 2 (June 1990, 565-

637); and Laurence J. Kotlikoff, “Intergenerational Transfers and Savings,” The Journal of 

Economic Perspectives, Vol. 2, No. 2 (Spring 1988, 41-58).

19 Hurd, “Research on the Elderly: Economic Status, Retirement, and Consumption and 

Saving,” p. 612. 

20 Alicia H. Munnell, Annika Sunden, Mauricio Soto, and Catherine Taylor, “How Will the 

Rise in 401(k) Plans Affect Bequests?”, Issue Brief No. 10 (Boston: Center for Retirement 

Research at Boston College, Nov. 2002.) 

21 Research has shown that inefficiencies exist in the annuity market due to a lack of

competition and adverse selection among those who purchase annuities. Adverse selection 

in the annuities market occurs because people who buy annuities also tend to live longer,

which is adverse to the insurer. See Olivia S. Mitchell, James M. Poterba, Mark J.

Warshawsky, and Jeffrey R. Brown, “New Evidence on the Money’s Worth of Individual 

Annuities,” The American Economic Review, Vol. 89, No. 5 (Dec. 1999) and National 

Center for Policy Analysis, “Social Security and Market Risk: The Annuity Market: Present 

and Future,” http://www.ncpa.org/pub/st/st244/s244c.html (accessed June 21, 2006). 

Page 13 GAO-06-718 Baby Boom Generation
by 2020. Women have experienced a similar rise—from 17 years in 1970 to 

over 19 years in 2005. By 2020, women who reach age 65 will be expected 

to live another 20 years.22

Another factor that may explain the observed slow spending down of 

assets among retirees is the bequest motive. National survey data show 

that many retirees intend to leave a sizeable bequest, which may explain 

their reluctance to spend down their wealth. Because more than threequarters of retirees have a bequest motive, many may never sell all of their 

assets. To the extent that retirees bequeath their assets instead of selling 

them for consumption, the result could be an intergenerational transfer 

rather than a mass sell-off that would negatively affect asset markets. In 

addition to current retirees, data from the HRS indicates that the majority 

of older baby boomers (those born between 1946 and 1955) expect to 

leave a bequest. Approximately 84 percent of these baby boomers expect 

to leave a bequest, while 49 percent expect the bequest to be at least 

$100,000. 

It is important to note that the baby boom generation’s asset sale behavior 

in retirement might differ from that of recent generations of retirees. First, 

fewer baby boomers are covered by DB plans that typically pay a regular 

income in retirement and increasingly have DC plans that build up benefits

as an account balance. To the extent that this shift means that boomers 

have an increased share of retirement wealth held as savings instead of as

income, this may require boomers to sell more assets to produce 

retirement income than did previous generations.

23 Second, unanticipated 

expenses, such as long-term care and other health care costs, may make 

actual bequests smaller than expected. Although 2002 HRS data indicates 

that only 8 percent of the leading edge of baby boomers have long-term 

care insurance, recent projections show that 35 percent of people 

currently age 65 will use nursing home care.24 If boomers are confronted 

 22 See GAO, Older Workers: Labor Can Help Employees and Employers Better Plan for the

Future, GAO-06-80 (Washington, D.C.: December 2005). 

23 Countering this potential effect is that the move away from DB plans would mean that

plan sponsors might have less of a need to sell assets to pay current retirees. 

24 The majority of nursing home care and home health care costs are not paid by private 

insurance or Medicare. In many cases, the burden of these expenses are borne by the

patient receiving care, until they have spent down nearly all of their assets and become 

eligible for Medicaid, which does cover these costs. Peter Kemper, Harriet L Komisar, and 

Lisa Alecxih, “Long-Term Care Over an Uncertain Future: What Can Current Retirees 

Expect?” Inquiry, Vol. 42, No. 4, Mar. 2006, pp. 335–350. 

Page 14 GAO-06-718 Baby Boom Generation
with higher than expected health care costs in retirement, they would have

a greater need to spend down their assets. 

Defined Benefit Pension 

Plans Unlikely to Sell Off 

Large Amounts of Stocks 

Solely as a Response to 

Boomer Retirement 

Households are not the only holders of financial assets that might shift or 

draw down their holdings as the baby boomers age. DB pension plans, 

which promise to provide a benefit that is generally based on an 

employee’s salary and years of service, hold assets to pay current and 

future benefits promised to plan participants, which are either current 

employees or separated or retired former employees. According to Federal 

Reserve Flow of Funds Accounts data, private-sector plans as a whole 

owned $1.8 trillion in assets in 2005. Of this amount, plans held 

approximately half in stocks.25 According to the Employee Benefit 

Research Institute (EBRI), federal government DB plans contained an

additional $815 billion in assets as of 2004. However, most of these DB 

plans invest in special Treasury securities that are non-marketable. State 

and local plans held an additional $2.6 trillion in assets; however, the data

do not separate DB and DC assets for these plans. If DB plans hold 

approximately 85 percent of state and local plan assets, as is the case for 

federal government plans, and if DB plans held approximately half of their 

assets as equities, this would mean state and local plans held an estimated 

$1.1 trillion in equities. Thus, public and private DB plans held an 

estimated approximate value of $2 trillion in stocks. Because of the 

number of boomers, we would expect that, as they retire, DB plans would 

pay out an increasing amount of benefits. This demographic shift could

cause plans to sell some of their holdings to provide current benefits. 

Indeed, a 1994 study projected that the pension system would cease to be

a source of saving for the economy roughly in 2024.26 We would also 

expect plans to convert some stocks to less volatile assets, such as cash 

 25 The Flow of Funds Accounts data report amounts held in mutual fund shares but do not

report the proportion of these shares that represent stock holdings. We assume that all 

assets listed in mutual fund shares are held in stocks to show the maximum amount of 

assets that could be held as stock. 

26 The study also noted that when the pension system begins to be a net seller of financial 

assets, it could depress asset prices, including stocks, bonds, and real estate. See Sylvester 

J. Schieber and John B. Shoven, “The Consequences of Population Aging on Private 

Pension Fund Saving and Asset Markets,” Working Paper No. 4665 (Cambridge, MA:

National Bureau of Economic Research, 1994). 

Page 15 GAO-06-718 Baby Boom Generation
and bonds, to better ensure that plans have sufficient money to pay 

current benefits.27

While DB plans may shift their assets in response to demographic changes,

it is unclear whether they would cause major variations in stock and bond

prices. First, even though DB plans hold about $2 trillion in stocks, this 

sum still represents a relatively small fraction of total U.S. stock wealth 

($16.1 trillion, as of 2004). Further, there are reasons why DB plans may 

not appreciably shift their investments away from stocks. While the baby 

boom retirement may increase the number of persons receiving benefits,

the DB participant pool has been aging long before the baby boom 

approached retirement. The percentage of private-sector DB participants 

made up of retirees has climbed steadily for the past 2 decades, from 16 

percent in 1980 to over 25 percent in 2002. Over this time, we have

observed little evidence of a shift in investments by private DB plans away 

from stocks and toward fixed-income assets. In 1993, private DB plans 

held just below half of their assets in stocks, about the same proportion as 

today; in 1999, at the recent stock market’s peak, plans held about 58 

percent of assets in stocks. 

Gradual Entry into 

Retirement and 

Subsequent Employment 

Plans Suggest a 

Cumulative Rather Than 

Sudden Effect on Markets 

The gradual transition of the baby boomers into retirement suggests that 

the sale of their financial assets will be spread out over a long period of 

time, which mitigates the risk of a shock to financial markets. The baby

boom generation spans a 19-year time period—the oldest baby boomers 

will turn age 62 in 2008, becoming eligible for Social Security benefits, but 

the youngest baby boomers will not reach age 62 until 2026. Among 

boomers in the U.S. population in 2004, the peak birth year was 1960, as 

seen in figure 5, and these boomers will turn age 62 in 2022. 

 27 Other factors might also cause DB plans to sell stocks in the near future. The number of

plans, which has been in decline since the mid-1980s, continues to shrink, and as plans

terminate, they use their assets to pay lump sum benefits or turn their assets over to

insurance companies or the Pension Benefit Guaranty Corporation, entities that tend to 

hold more bonds than stocks. As DB plans continue to terminate, this trend would likely 

cause a decline in the level of stocks in the DB system. Also, pending pension reform

legislation in Congress may create incentives for plan sponsors to shift their asset 

allocation from stocks toward bonds and other less volatile assets. 

Page 16 GAO-06-718 Baby Boom Generation
Figure 5: 2004 U.S. Resident Population, by Birth Year 

0 

1 

2 

3 

4 

5 

1920 

1922 

1924 

1926 

1928 

1930 

1932 

1934 

1936 

1938 

1940 

1942 

1944 

1946 

1948 

1950 

1952 

1954 

1956 

1958 

1960 

1962 

1964 

1966 

1968 

1970 

1972 

1974 

1976 

1978 

1980 

1982 

1984 

1986 

1988 

1990 

1992 

1994 

1996 

1998 

2000 

2002 

Population (in millions) 

Year 

Nonbaby boomers

Baby boomers

Source: 2006 Statistical Abstract of the United States.

As boomers gradually enter retirement, the share of the population age 65 

and older is projected to continue increasing until about 2040, at which 

point it is expected to plateau, as seen in figure 6. Thus, the aging of the 

baby boom generation, in conjunction with the aging of the overall U.S. 

population, is a cumulative development rather than a sudden change. 

Page 17 GAO-06-718 Baby Boom Generation
Figure 6: Share of the U.S. Population Age 65 and Older, Projected to 2050 

0 

4 

8 

12 

16 

20 

24 

2000 2010 2020 2030 2040 2050 

Percentage 

Source: U.S. Census Bureau.

Year 

In addition, the expected increase in the number of baby boomers working 

past age 62 may also reduce the likelihood of a dramatic decline in 

financial asset prices. An increase in employment at older ages could 

facilitate the accumulation of financial assets over a longer period of time 

than was typical for earlier generations (albeit also needing to cover 

consumption over a longer life expectancy).28 Furthermore, continuing to 

work for pay in retirement, often called partial or phased retirement, 

would reduce the need to sell assets to provide income.29 In fact, some 

degree of extended employment has already been evident since the late 

1990s, as seen in figure 7. From 1998 to 2005, the labor force participation 

rate of men and women age 65 and older increased by 20 percent and 34 

percent, respectively. Survey data show that such a trend is expected to 

continue: Data from the 2004 SCF indicate that the majority of boomers 

intend to work past age 62, with boomers most commonly reporting they 

 28 From the perspective of the overall economy, increased employment at older ages would

also support continued growth of the labor supply, which may improve the productivity of 

and financial returns to capital. 

29 In general, partial retirement refers to someone who classifies himself or herself as 

partially or fully retired but is still working for pay on a part-time basis.

Page 18 GAO-06-718 Baby Boom Generation
expect to work full time until age 65. Almost 32 percent of boomers said 

they never intend to stop working for pay. Another study by the AARP in 

2004 found that many baby boomers expect to go back to work after they 

formally retire—approximately 79 percent of boomers said they intend to 

work for pay in retirement.30 Other research has shown that about onethird of those who return to work from retirement do so out of financial

necessity.31 These developments suggest that baby boomers may be less 

inclined to take retirement at age 62. However, some boomers may not be 

able to work as long as they expect because of health problems or limited 

employment opportunities.32 To the extent that these boomers follow 

through on their expressed plans to continue paid work, their income from 

earnings would offset some of their need to spend down assets. 

 30 AARP, Baby Boomers Envision Retirement II: Survey of Baby Boomers’ Expectations 

for Retirement, Prepared for AARP Environmental Analysis by Roper ASW, 2004. 

31 Putnam Investments, Retirement Only a Breather: 7 Million Go Back to Work.

(Research conducted by Brightwork Partners, 2005). 

32 In prior work, we found that, although the majority of full-time workers age 55 or older 

indicate they would like to gradually reduce their work hours in transition to full 

retirement, many are constrained by health problems or perceive limited employment 

opportunities. See: GAO, Older Workers: Labor Can Help Employers and Employees Plan

Better for the Future, GAO-06-80 (Washington, D.C.: Dec. 5, 2005). 

Page 19 GAO-06-718 Baby Boom Generation
Figure 7: Labor Force Participation Rates for Americans, Ages 55 and Older 

0 

20 

40 

60 

80 

100 

1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 

5 

10 

15 

20 

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 

40 

45 

50 

55 

60 

65 

70 

90 91 92 93 94 95 96 97 98 99 00 2001 02 03 04 05

men 

men 

women 

women 

Ages

55-64 

Ages 65 

and older 

Percentage 1990 - 2005 

Source: U.S. Bureau of Labor Statistics.

The Role of Housing, a Key 

Asset for Baby Boomers in 

Retirement Security, 

Continues to Evolve 

Housing represents a large portion of most baby boomers’ wealth and their 

management and use of this asset may have some effect on their decisions 

to sell assets in the financial markets. For a majority of boomers, the 

primary residence accounts for their largest source of wealth—

outstripping DC pensions, personal savings, vehicles, and other 

nonfinancial assets. Home ownership rates among boomers exceed 75 

percent, and recent years of appreciation in many housing markets have 

increased the net wealth of many boomers. This suggests that a price 

decline in housing, a prospect that many analysts appear to be concerned 

about, could have a much greater impact on the overall wealth of boomers 

than a financial market meltdown. While research has suggested that baby 

boomers have influenced housing demand and, in turn, prices, assessing 

the potential impact of the baby boom retirement on the housing market is 

beyond the scope of our work. 

Interestingly, according to experts we interviewed, equity in the primary 

residence has not historically been viewed by retirees as a source of 

consumable wealth, except in the case of financial emergencies. Reverse 

mortgages, which do not require repayment until the owner moves from 

the residence or dies, could grow more attractive for financing portions of 

Page 20 GAO-06-718 Baby Boom Generation
retirement spending, particularly for those baby boomers who are “house 

rich but cash poor” and have few other assets or sources of income.33 For 

boomers who do own financial assets, an expansion of the reverse 

mortgage market might reduce their need to sell financial assets rapidly. 

However, boomers also appear to be carrying more debt than did previous

generations. Our analysis of the SCF data shows that the mean debt-toasset ratio for people aged 52 to 58 rose from 24.5 percent in 1992 to 70.9 

percent in 2004.34 To the extent that baby boomers continue to be willing 

to carry debt into retirement, they may require more income in retirement 

to make payments on this debt. 

Researchers and financial industry representatives largely expect the U.S.

baby boom’s retirement to have little or no impact on the stock and bond 

markets. A wide range of studies, both simulation-based and empirical, 

either predicted a small, negative impact or found little to no association 

between the population’s age structure and the performance of financial

markets. Financial industry representatives whom we interviewed also 

generally expect the baby boom retirement not to have a significant 

impact on financial asset returns because of the concentration of assets 

among a minority of boomers, the possibility of increased global demand 

for U.S. assets, and other reasons. Broadly consistent with the literature 

and views of financial industry representatives, our statistical analysis 

indicates that past changes in macroeconomic and financial factors have 

explained more of the variation in historical stock returns than 

demographic changes. Variables such as industrial production and 

dividends explained close to half of the variation in stock returns, but 

changes in the population’s age structure explained on average less than 6 

percent. If the pattern holds, our findings indicate that such factors could 

outweigh any future demographic effect on stock returns. 

Researchers and 

Financial Industry 

Representatives

Largely Foresee Little 

to No Impact on 

Financial Markets as 

the Baby Boomers 

Retire 

 33 Reverse mortgages allow those aged 62 and older to access equity in their homes through 

lump-sum payments, structured monthly payments, or lines of credit to the homeowner

based on the value of the home. Once the borrower moves from the residence or dies, the 

principal, interest, and all fees immediately come due.

34 The debt-to-value ratio measures total debt in relation to total assets. The percentage of 

debt to assets increases as a person takes on more debt relative to the underlying asset, 

such as a home or an automobile. 

Page 21 GAO-06-718 Baby Boom Generation
With few exceptions, the academic studies we reviewed indicated that the 

retirement of U.S. baby boomers will have little to no effect on the 

financial markets. Studies that used models to simulate the market effects 

of a baby boom followed by a decline in the birth rate generally showed a 

small, negative effect on financial asset returns. Similarly, most of the 

empirical studies, which statistically examined the impact of past changes

in the U.S. population’s age structure on rates of return, suggested that the 

baby boom retirement will have a minimal, if any, effect on financial asset 

returns.35

Thirteen studies that we reviewed used models of the economy to simulate 

how a hypothetical baby boom followed by a baby bust would affect 

financial asset returns.36 The simulation models generally found that such 

demographic shifts can affect returns through changes in the saving, 

investment, and workforce decisions made by the different generations 

over their lifetime. For example, baby boomers cause changes in the labor 

supply and aggregate saving as they progress through life, influencing the 

demand for assets and productivity of capital and, thus, the rates of return. 

Specifically, the models predicted that baby boomers cause financial asset 

returns to increase as they enter the labor force and save for retirement 

and then cause returns to decline as they enter retirement and spend their 

savings. According to a recent study surveying the literature, such 

simulation models suggest, on the whole, that U.S. baby boomers can 

expect to earn on their financial assets around half a percentage point less 

each year over their lifetime than the generation would have earned absent 

a baby boom.37 In effect, for two investors—one of whom earns 7 percent

and the other earns 6.5 percent annually over a 30-year period—the former 

Academic Studies Largely 

Foresee Little to No Baby 

Boom Retirement Effect 

on the Financial Markets 

Simulation-Based Studies 

 35 In the studies that we reviewed some researchers measured changes in the stock market 

based on annual price changes, while others used annual rates of return. The two measures

are highly correlated, with rates of return taking into account dividends paid to 

shareholders as well as price changes. For bonds, some researchers measured changes in 

the market by annual prices changes, while others used yields or returns. Bond prices and 

yields are inversely related, with an increase in the price of a bond reducing its yield. When

discussing the results of the individual studies, we used the market-performance measure 

used by the researchers. 

36 See appendix II for a list of the studies we reviewed. 

37 James M. Poterba, “Impact of Population Aging on Financial Markets in Developed 

Countries,” Economic Review (Kansas City: Federal Reserve Bank of Kansas City, 2004). 

Page 22 GAO-06-718 Baby Boom Generation
investor would earn $6.61 for every dollar saved at the beginning of the 

period and latter investor would earn $5.61 for every dollar saved.38

None of the simulation-based studies concluded that the U.S. baby boom 

retirement will precipitate a sudden and sharp decline in asset prices, and 

some studies presented their results in quantitative terms. One of the 

studies, for example, predicted that the baby boom’s retirement would at

worst lower stock prices below what they would otherwise be by roughly 

16 percent over a 20-year period starting around 2012.39 This decline, 

however, is equivalent to around 0.87 percent each year—somewhat small 

in comparison to real annual U.S. stock returns, which have averaged 

about 8.7 percent annually since 1948. The study therefore concluded that 

the size of the decline is much too small to justify the term “meltdown.” 

Moreover, another study predicted that baby boomers can expect the 

returns on their retirement savings to be about 1 percentage point below 

their current annual returns.40 The study’s lower returns reflect the decline

in the productivity of capital that results from fewer workers being 

available (due to the baby boom retirement) to put the capital to 

productive use. A third study’s results suggest that fluctuations in the size 

of the different generations induce substantial changes in equity prices, 

but the study does not conclude that the baby boom’s retirement will lead 

to a sharp and sudden decline in asset prices.41

The simulation models we reviewed, by design, excluded or simplified 

some factors that were difficult to quantify or involved uncertainty that 

may cause the models to overstate the baby boom’s impact on the 

 38 The proportional effect of a 0.5 percent decline in annual return would be smaller if the 

baseline level of the return was higher, but the absolute effect in terms of dollars would be

larger. 

39 K. M. Lim and D. N. Weil, “The Baby Boom and the Stock Market Boom,” Scandinavian

Journal of Economics, vol. 105, no. 3 (2003). 

40 The study concludes that baby boomers will be better off than their parents and children 

in terms of their lifetime consumption, because asset returns rise during their working

years and because they have relatively fewer children, boosting their ability to save early 

on. Robin Brooks, “Asset-Market Effects of the Baby Boom and Social-Security Reform,” 

American Economic Review, vol. 92, no. 2 (2002). 

41 The study’s simulation model predicted that demographic changes accounted for around 

half of the variation between the highest and lowest stock prices. John Geanakoplos,

Michael Magill, and Martine Quinzii, “Demography and the Long-Run Predictability of the

Stock Market,” Cowles Foundation Paper No. 1099 (New Haven, Conn.: Cowles 

Foundation for Research in Economics, Yale University, 2004). 

Page 23 GAO-06-718 Baby Boom Generation
markets. For example, some models assumed that baby boomers will sell 

their assets solely to a relatively smaller generation of U.S. investors when 

they retire. Some researchers have noted that if China and India were to 

continue their rapid economic growth, they may spur demand for the 

assets that baby boomers will sell in retirement.42 Supporting this view, 

other research suggests that global factors may be more important than 

domestic factors in explaining stock returns in developed countries.43

Some models assumed that individuals in the same generation enter the 

labor force at the same time, work a fixed amount, and retire at the same 

time. In reality, some may work full or part-time after reaching retirement 

age.44 Likewise, the baby boomers’ children, rather than working a fixed

amount, may delay their entry into the labor force and take advantage of

job opportunities created by retiring baby boomers. These factors could 

dampen the effect of the baby boomer retirement on the markets.45 A few 

of the models neglect that some investors may be forward-looking and 

anticipate the potential effect of the aging baby boomers on the markets. 

To the extent that such investors do so, current financial asset prices 

would reflect, at least partially, the future effect of the baby boom’s 

retirement and thus dampen the event’s effect on asset prices when it 

actually occurs.46 Finally, the models typically do not include a significant 

The Baby Boom Retirement and 

the Equity Premium

While some researchers and others

suggest that the baby boom retirement will 

cause rates of return on financial assets to 

fall, some also suggest that the event will 

affect the equity premium, or difference in 

returns between risky and safe assets

(such as between stocks and U.S. Treasury 

bonds). This effect is based on the belief 

that aging boomers will shift their portfolios

from stocks to bonds, because they will 

tend to prefer safe assets since they will 

have less time weather potential price 

declines in risky assets. Several simulation 

models largely predicted that boomers will 

shift from stocks to bonds as they near and 

enter retirement, temporarily causing bond 

returns to decline relatively more than stock 

returns and resulting in a higher equity 

premium. In contrast, several empirical 

studies examining how demographic shifts

have affected the equity premium generally 

did not find statistical evidence supporting 

the simulation models’ predictions. Such 

findings are consistent with a gradual, as

opposed to a sudden, shift from stocks to 

bonds, as exemplified by the asset 

allocation strategies provided by some 

“lifecycle” mutual funds and advised by 

some financial planners. Indeed, investment 

advisers and other financial service 

representatives that we interviewed 

emphasized that retired boomers should 

continue to hold some of their savings in 

stocks to hedge inflation and the risk of 

outliving their savings. Likewise, our 

analysis of national survey data also shows

that current retirees remain significantly 

invested in stocks.

Source: GAO

 42 A study exploring the implications of the assumption found that financial asset returns in 

Germany would fall by about 1.4 percentage points if baby boomers were only allowed to

buy and sell assets domestically, but would fall by about 1 percentage point if the country’s

economy were open to international financial flows. See Axel Börsch-Supan, “Global Aging:

Issues, Answers, More Questions,” Working Paper WP 2004-084, University of Michigan 

Retirement Research Center (2004). 

43 Swee Sum Lam and William Wee-Lian Ang “Globalization and Stock Market Returns,” 

Global Economy Journal, vol. 6, no. 1 (2006). 

44 For example, a recent study estimated based on a survey that about 7 million previously 

retired U.S. individuals have returned to work for pay, representing almost one-third of the

retirees. See Brightwork Partners, LLC, The Working Retired, a study prepared for Putnam

Investments (Boston: 2005). 

45 See, for example, Monika Bütler and Philipp Harms, “Old Folks and Spoiled Brats: Why

the Baby-Boomers’ Savings Crisis Need Not Be That Bad,” Discussion Paper No. 2001-42, 

CentER (2001). The researchers found that the effect of a baby boom on asset prices could 

be dampened, in part by the early retirement of baby-boom parents and the late entry of the 

baby-boom children into the labor force. 

46 Although the extent to which investors are forward-looking is an important factor in

determining the current and future impact of demographic change on financial asset prices, 

the degree of foresight is open to question. See, for example, Stefano DellaVigna and 

Joshua M. Pollet, Attention, Demographics, and the Stock Market (Department of

Economics, University of California, Berkeley: 2003 mimeographed). 

Page 24 GAO-06-718 Baby Boom Generation
increase in immigration, but such an outcome would increase the labor 

force and be expected to raise the productivity of capital and, thus, the 

return on financial assets.47

Seven empirical studies of the U.S. financial markets we reviewed 

suggested, on average, that the retirement of U.S. baby boomers will have 

a minimal, if any, impact on financial asset returns.48 These studies 

specifically tested whether changes in the U.S. population’s age structure 

have affected stock returns or bond yields or both over different periods, 

ranging from 1910 to 2003. These studies focused primarily on changes in

the size of the U.S. middle age population (roughly age 40 to 64) or its 

proportion to other age segments of the population. People in this age 

group are presumably in their peak earning and saving years and, thus, 

expected to have the most significant impact on financial asset returns. 

Empirical Studies 

These empirical studies are inherently retrospective. Therefore, care must 

be taken in drawing conclusions about a future relationship between 

demographics and asset performance, especially given that the historical

data do not feature an increase in the retired population of the magnitude 

that will occur when the U.S. baby boomers retire. However, the 

significant shift in the structure of the population that occurred as the 

boomers entered the labor force and later their peak earning years should 

provide an indication of how demographic change influences financial 

asset returns. 

For stocks, four of the seven studies found statistical evidence implying 

that the past increases in the relative size of the U.S. middle age 

population have increased stock returns.49 This finding supports the 

 47 The overall impact of immigration becomes more ambiguous when considering the

federal government’s budget. Immigration will boost tax revenues but also can increase 

outlays for transfer programs related to health, education, and welfare if the immigrating 

cohort is less-skilled. See, for example, Ronald Lee and Timothy Miller, “Immigration,

Social Security, and Broader Fiscal Impacts,” The American Economic Review, vol. 90, no. 

2 (2000). 

48 See appendix II for a list of the studies that we reviewed. 

49 See, Steven M. Bergantino, “Life Cycle Investment Behavior, Demographics, and Asset 

Prices,” (Ph.D diss., Massachusetts Institute of Technology, 1998); Robin J. Brooks, “Asset 

Market and Savings Effects of Demographic Transitions” (Ph.D diss., Yale University, 

1998); E. Phillip Davis and Christine Li, “Demographics and Financial Asset Prices in the

Major Industrial Economies,” Working Paper (Brunel University, West London: 2003); and 

Geanakoplos, Magill, and Quinzii (2004). 

Page 25 GAO-06-718 Baby Boom Generation
simulation-model predictions that a relative decrease in the middle age 

population—as is expected to occur when baby boomers begin to retire—

will lower stock returns. In contrast, two of the studies found little 

evidence that past changes in the U.S. middle age population have had any 

measurable effect on stock returns.50 Finally, the remaining study found 

evidence implying that a relative decrease in the U.S. middle age 

population in the future would increase, rather than decrease, stock 

returns.51

For the four studies whose statistical results implied that the baby boom 

retirement will cause stock returns to decline, we determined that the 

magnitude of their demographic effect, on balance, was relatively small. 

Using U.S. Census Bureau data, we extrapolated from three of the four 

studies’ results to estimate the average annual change in returns of the 

Standard and Poor’s (S&P) 500 Index that the studies would have 

attributed to demographic changes from 1986 to 2004. During this period, 

baby boomers first began to turn age 40 and the proportion of individuals 

age 40 to 64 went from about 24.5 percent of the population to about 32 

percent.52 We found two of the studies’ results show that the increase in 

the middle age population from 1986 to 2004 led stock returns, on average,

to increase by 0.19 and 0.10 percentage points each year, respectively. We

found that the third study’s results showed a much larger average annual 

increase of about 6.7 percentage points from 1986 to 2004. To put these 

three estimates into context, the average annual real return of the S&P 500 

Index during this period was around 10 percent. The last estimate, 

 50 Peter S. Yoo, “Age Distributions and Returns of Financial Assets,” Working Paper 1994-

002A (St. Louis: Federal Reserve Bank of St. Louis, 1994), and James M. Poterba, “The

Impact of Population Aging on Financial Markets,” Working Paper No. 10851 (Cambridge, 

Mass.: National Bureau of Economic Research, 2004). 

51 Diane Macunovich, “Discussion of Social Security: How Social and Secure Should It Be?”, 

Social Security Reform: Links to Saving, Investment, and Growth, Steven Sass and 

Robert Triest, eds. (Boston: Federal Reserve Bank of Boston, 1997). While the study found

evidence that a decrease in the 45-year olds increased stock returns, it also found evidence 

that an increase in the 66-year old population reduced stock returns, leaving the aggregate 

effect of the baby boom retirement on stock returns unclear. 

52 We arrived at our estimates in several stages. First, we used U.S. Census Bureau data to 

calculate the demographic variables in each study from 1948 to 2004. Second, we multiplied 

the demographic regression coefficients in each study by their appropriate demographic 

variables for the period from 1948 to 2004. Third, to estimate the relative impact of the

baby boomers on stock returns from 1986 to 2004, we subtracted the average annual 

impact on stock returns from 1948 to 1985 (a period of relative stability in the middle age 

population) from the average annual impact on stock returns from 1986 to 2004 (a period of 

rapid growth in the middle age population). 

Page 26 GAO-06-718 Baby Boom Generation
however, may exaggerate the probable impact of the baby boom 

retirement on stock returns.53 The fourth study’s methodology did not 

allow us to use U.S. census data to estimate the effect of its results on 

stock returns from 1986 to 2004. Nonetheless, the study estimated that 

demographically driven changes in the demand for stocks can account for 

about 77 percent of the annual increase in real stock prices between 1986 

and 1997 and predicted that stock prices will begin to fall around 2015 as a 

result of falling demographic demand. 

Besides testing for the effect of demographic shifts on stock returns, five 

of the seven studies included bonds in their analyses and largely found 

that the baby boom retirement will have a small effect or no effect on bond 

yields. Three studies found statistical evidence indicating that the past 

increase in the relative size of the U.S. middle age population reduced 

long-term bond yields. In turn, the finding suggests that the projected 

decrease in the middle age population in the future would raise yields. 

Extrapolating the results of one study, we find its estimates imply that the 

increase in the U.S. middle age population from 1986 to 2004 reduced longterm bond yields by about 0.42 percentage points each year, compared to 

actual real yields that averaged 3.41 percent over the same time period. 

The other two studies tested how the demographic shift affected long-term 

bond prices rather than yields, but an increase in prices would, in effect, 

reduce yields.

54 We found that the results of one of the studies showed that 

the demographic shift from 1986 to 2004 raised bond prices by only about

0.05 percentage points each year. The other study’s methodology did not

allow us to estimate the effect, but the study estimated that 

demographically driven changes in the demand for bonds can account for 

at least 81 percent of the annual increase in real bond prices between 1986 

 53 In their simulation-based model, the researchers used as their demographic variable the 

ratio of the U.S. population age 40 to 59 to the U.S. population age 20 to 39. In their 

empirical analyses, they modified their demographic variable, in our view, without an

economic rationale to capture more of the variation in stock returns, switching to the ratio 

of the population age 40 to 49 to the population age 20 to 29. By choosing the demographic

variable purely on the basis of statistical association, the change likely biased their 

estimated effect upward. Also, the study’s demographic variable is projected to fluctuate

much less in the future, suggesting that upcoming demographic changes will have less of an

impact on stock returns. A researcher estimated that the projected changes in the study’s 

demographic variable from 2000 to 2050 would result in a 0.60 percentage point decline in 

annual real returns. 

54 The interest payment a borrower makes on a bond is typically fixed, so an increase in the 

bond’s price reduces the fixed payment as a proportion of the bond’s price and, thus, 

reduces the bond’s yield. 

Page 27 GAO-06-718 Baby Boom Generation
and 1997 and predicted that bond prices will begin to fall around 2015 as a 

result of falling demographic demand. In contrast to these studies, two 

studies found little statistical evidence to indicate that past changes in the 

middle age population have had any measurable effect on long-term bond 

returns.55

Financial Industry 

Representatives Do Not 

Expect Baby Boom 

Retirement to Have a 

Significant Financial 

Market Impact 

The financial industry representatives with whom we met generally told us 

that they do not expect U.S. baby boomers to have a significant impact on

the financial markets when they retire. They cited a number of factors that 

could mitigate a baby boom induced market decline, many of which we 

discussed earlier.56 For example, some mentioned the concentration of 

assets among a minority of households, the long time span over which 

boomers will be retiring, and the possibility for many boomers to continue 

working past traditional retirement ages. Some also noted that baby 

boomers will continue to need to hold stocks well into retirement to hedge 

inflation and to earn a higher rate of return to hedge the risk of outliving 

their savings, reducing the likelihood of a sharp sell-off of stock. A number 

of representatives cited developments that could increase the demand for 

U.S. assets in the future, such as the continued economic growth of 

developing countries and an increase in immigration. Finally, several 

commented that interest rates, business cycles, and other factors that have

played the primary role in influencing financial asset returns are likely to 

overwhelm any future demographic effect from changes in the labor force 

or life cycle savings behavior. 

 55 These studies, however, found statistical evidence suggesting that the past increase in the

middle age population has decreased returns on “Treasury bills,” or short-term bonds. This 

finding suggests that the projected decrease in the middle age population will increase 

Treasury bill returns. 

56 While it may not be in the interest of the financial industry to make alarming projections 

about the baby boom retirement, mutual fund companies and broker-dealers we

interviewed offer stock funds, bond funds, annuities, and international stock funds. As a 

result, they have a broad range of products to offer workers and retirees in the event that

they become concerned about the risks of a particular asset class or country. 

Page 28 GAO-06-718 Baby Boom Generation
Our statistical analysis indicates that macroeconomic and financial factors 

explain more of the variation in historical stock returns than population 

shifts and suggests that such factors could outweigh any future 

demographic effect on stock returns. In addition, factors not captured by 

our model were also larger sources of stock return variation than the 

demographic variables we selected. We undertook our own statistical 

analysis, because many of the empirical studies we reviewed either did not

include relevant variables that influence stock returns in their models or 

included them but did not discuss the importance of these variables 

relative to the demographic variables.57 To broaden the analysis, we 

developed a statistical model of stock returns based on the S&P 500 Index 

to compare the effects of changes in demographic, macroeconomic, and 

financial variables on returns from 1948 to 2004.

58 As shown in figure 8, 

fluctuations in the macroeconomic and financial variables that we selected 

collectively explain about 47 percent of the variation in stock returns over

the period. These variables are the growth rate of industrial production,59

the dividend yield, the difference between interest rates on long- and 

short-term bonds, and the difference between interest rates on risky and 

safe corporate bonds—all found in previous studies to be significant 

determinants of stock returns. These variables are likely to contain 

information about current or future corporate profits. In contrast, our four 

demographic variables explained only between 1 percent and 8 percent of 

the variation in the annual stock returns over the period. These variables 

were based on population measures found to be statistically significant in

the empirical studies we reviewed: the proportion of the U.S. population 

age 40 to 64, the ratio of the population age 40 to 49 to the population age 

20 to 29, and annual changes in the two. Note, however, that almost half of 

the variation in stock returns was explained by neither the 

macroeconomic and financial variables nor the demographic factors we 

tested, a finding that is comparable to similar studies. Hence, some 

determinants of stock returns remain unknown or difficult to quantify. 

Broad Economic Factors 

Will Likely Have a Greater 

Impact on Financial 

Markets Than Will 

Demographics 

 57 These studies include, for example, Geanakoplos, Magill, and Quinzii (2004), Poterba

(2004), and Davis and Li (2003). 

58 See appendix IV for a complete description of our statistical model and results. 

59 Industrial production is the output of U.S. manufactured goods, mines, and utilities. Its 

growth rate is highly correlated with gross domestic product, a broader measure of the

economy’s output. While labor force growth should influence growth of the overall 

economy, including industrial production, we believe that the significance of industrial 

production in our model is driven primarily by changes in industrial production related to

business cycle fluctuations. 

Page 29 GAO-06-718 Baby Boom Generation
Figure 8: Sources of Stock Market Return Variation

5.7%

46.6% 47.7% 

Source: GAO analysis of S&P 500 returns, 1948-2004.

Demographic variables (average)

Macroeconomic and financial variables

Not explained by selected 

variables (average) 

The statistical model shows that financial markets are subject to a 

considerable amount of uncertainty and are affected by a multitude of 

known and unknown factors. However, of those known factors, the 

majority of the explanatory power stems from developments other than 

domestic demographic change. Simply put, demographic variables do not

vary enough from year to year to explain the stock market ups and downs 

seen in the data. This makes it unlikely that demographic changes, alone, 

could induce a sudden and sharp change in stock prices, but leaves open

the possibility for such changes to lead to a sustained reduction in returns. 

At the same time, fluctuations in dividends and industrial production, 

which are much more variable than demographic changes, may obscure 

any demographic effect in future stock market performance. For example, 

a large recession or a significant reduction in dividends would have a 

negative effect on annual returns that would likely overwhelm any 

reduction in returns resulting from the baby boom retirement. Conversely, 

an unanticipated increase in productivity or economic growth would be 

expected to increase returns substantially and likely dwarf the effect of 

year-over-year changes in the relative size of the retired population. 

Page 30 GAO-06-718 Baby Boom Generation
While the baby boom retirement is not likely to cause a sharp decline in

asset prices or returns, the retirement security of boomers and future 

generations will likely depend increasingly on individual saving and rates 

of return as guaranteed sources of income become less available. This 

reflects the decline of coverage by traditional DB pension plans, which 

typically pay a regular income throughout retirement, and the rise of 

account-based DC plans. Uncertainties about the future level of Social 

Security benefits, including the possible replacement of some defined

benefits by private accounts, and the projected increases in medical and 

long-term care costs add to the trend toward individuals taking on more 

responsibility and risk for their retirement. All of these developments 

magnify the importance of achieving rates of return on savings high 

enough to produce sufficient income for a secure retirement. In this 

environment, individuals will need to become more educated about 

financial issues, both in accumulating sufficient assets as well as learning

to draw them down effectively during a potentially long retirement. 

Baby Boomers and 

Future Generations 

Likely to Increasingly 

Rely on Their Own 

Savings, Placing 

Greater Importance 

on Rates of Return 

and Financial 

Management Skills 

As Baby Boomers Retire, 

Fewer May Receive 

Income from Traditional 

Pensions 

Changes in pension design will require many baby boomers and others to 

take greater responsibility in providing for their retirement income, 

increasing the importance of rates of return for them. The past few 

decades have witnessed a dramatic shift from DB plans to DC plans. From 

1985 to 2004, the number of private sector DB plans has shrunk from about 

114,000 to 31,000. From 1985 to 2002 (the latest year for which complete 

data are available), the number of DC plans almost doubled, increasing 

from 346,000 to 686,000. Furthermore, the percentage of full-time 

employees participating in a DB plan (at medium and large firms) declined 

from 80 to 33 percent from 1985 to 2003, while DC coverage increased 

from 41 to 51 percent over the period.

60 The shift in pension design has 

affected many boomers. According to the 2004 SCF, about 50 percent of 

people older than the baby boomers reported receiving benefits from a DB 

plan, but fewer than 44 percent of baby boomers have such coverage. 

However, within the baby boom generation, there is a noticeable 

difference: 46 percent of older boomers (born between 1946 and 1955) 

reported having a DB plan, while only 39 percent of young boomers (born 

 60 Participation in DB plans is typically much higher in the public sector. For 1998, the

latest year for which data are available, 90 percent of state and local government workers 

participated in a DB plan. 

Page 31 GAO-06-718 Baby Boom Generation
between 1956 and 1964) had a DB plan (see table 1).61 According to the 

SCF, the percentage of households age 35 to 44 with a DC plan increased

from 18 percent in 1992 to 42 percent in 2001. 

Table 1: Pension Coverage by Plan Design, 2004, as Percentage of Birth Cohort 

Birth years DB plan only DC plan only Both DB and DC 

1956-1964 16.8 21.6 22.1

1946-1955 23.5 18.6 22.2

1936-1945 34.1 10.7 16.5

Source: GAO Analysis of 2004 SCF. 

The shift from DB to DC plans places greater financial management 

responsibility on a growing number of baby boomers and makes their 

retirement savings more dependent on financial market performance. 

Unlike DB plans, DC plans do not promise a specified benefit for life. 

Rather, DC plan benefits depend on the amount of contributions, if any, 

made to the DC plan by the employee and the employer, and the returns 

earned on assets held in the plan. Because there is no guaranteed benefit,

the responsibility to manage these assets and the risk of having

insufficient pension benefits at retirement falls on the individual. Similar 

to DB plans, some DC plans offer their participants the option of 

converting their balance into an annuity upon retirement, but DC plan 

participants typically take or keep their benefits in lump-sum format.62

Small changes in average rates of return can affect the amount 

accumulated by retirement and income generated during retirement. For 

example, if a boomer saved $500 each year from 1964 until retirement in 

2008 and earned 8 percent each year, he or she would accumulate almost 

$209,000 at retirement. The same worker earning 7 percent each year over

the same period would accumulate only $153,000 at retirement, a 

 61 While this trend may partially reflect that older workers are more likely to have pension 

coverage than younger workers, the shrinking of DB plans and the aging of its participant 

pool are well-established and likely to continue. 

62 One study by the Investment Company Institute found that 32 percent of DC participants

chose an annuity upon taking benefits. See Investment Company Institute, Defined

Contribution Plan Distribution Choices at Retirement: A Survey of Employees Retiring 

Between 1995 and 2000 (Washington, D.C.: Fall 2000). A 2003 GAO study found a much

lower incidence, with fewer than 10 percent of DC participants choosing to annuitize upon 

retirement (see GAO-03-810). As of 2000, about 38 percent of DC plans offered the option of 

receiving benefits as an annuity. 

Page 32 GAO-06-718 Baby Boom Generation
difference in total saving of 27 percent. Moreover, rates of return can have 

a similar affect on retirement income. With $209,000 at retirement, the 

retiree could spend $19,683 each year for 20 years if he or she continued to

earn 8 percent each year in retirement. If the annual rate of return dropped 

one percentage point to 7 percent, the same amount of retirement savings 

would generate only about $18,412 each year for 20 years, a difference of 

6.5 percent in annual retirement income. Retirees depending on converting

savings to income are particularly dependent on rates of return, since they 

may have limited employment options. Similarly, workers nearing 

retirement may be more affected by fluctuations in rates of return than 

younger workers, who would have more working years to make up any 

declines or losses. 

Although DC plans place greater responsibility on individuals for their 

retirement security, statistics indicate that so far at least some have yet to

fully accept it. First, many workers who are covered by a DC plan do not 

participate in the plan. Recent data indicate that only about 78 percent of 

workers covered by a DC plan actually participate in the plan. Second,

even among baby boom participants, many have not saved much in these 

accounts. Figure 9 shows the percentage of boomers with account 

balances in their DC pensions and IRAs, which are personal accounts 

where individuals can accumulate retirement savings. Over one-half of 

households headed by someone born from 1946 to 1955 did not have a DC

pension; for those that did have a DC pension, their median balance was 

$58,490, an amount that would generate just a $438 monthly annuity 

starting at age 65. Similarly, only 38 percent reported having an IRA, and

the median IRA balance among those participating was only $37,000, an 

amount that would generate a monthly annuity of only $277.63

 63 We calculated annuity equivalents using the annuity calculator from the Thrift Savings 

Plan (www.tsp.gov), assuming an interest rate of 5.5 percent, single life benefits beginning

at age 65, no joint survivor benefits, and level payments. 

Page 33 GAO-06-718 Baby Boom Generation
Figure 9: Individual Retirement Account and Defined Contribution Pension 

Balances for Older and Younger Baby Boomers, 2003

0 

20 

40 

60 

80 

100 

0 

20 

40 

60 

80 

100 

More than $500,000 

$100,001-500,000 

$50,001-100,000 

$10,001-50,000 

$1-10,000 

$0 

Younger 

(born 

1956- 

1964) 

Older 

(born 

1946- 

1955) 

Baby boomers

IRAs

Defined

contribution

pensions

Percentage 

Younger 

(born 

1956- 

1964) 

Older 

(born 

1946- 

1955) 

Baby boomers

Percentage 

Source: GAO analysis of 2004 Survey of Consumer Finances.

These statistics may not provide a complete picture for some individuals 

and households, since those with a small DC plan account balance also 

may have a DB plan and thus may not have the same need to contribute to

their account. However, EBRI found that, as of 2004, median savings in 

401(k) accounts, a type of DC plan, were higher for every age group up to

age 64 for those with a DB plan than those with only a 401(k). Also, the 

median balances for those with only 401(k) plans may not be enough to 

Page 34 GAO-06-718 Baby Boom Generation
support them in retirement. For families with the head of family age 55 to

64 in 2004 with only a 401(k), EBRI estimated that their median balance 

was $50,000; for those age 45 to 54, the median was $40,000. While many in

these age groups could continue to work for several years before reaching 

retirement age, without substantially higher savings, these households may 

be primarily dependent on income from Social Security during retirement. 

Extending our analysis of the allocation of baby boomer assets generally 

reveals that financial assets are, in general, a small portion of boomers’ 

asset portfolios. Among all boomers, housing is the largest asset for the 

majority of households, with vehicles making up the second largest 

portion of wealth. Figure 10 shows the allocation of baby boomer assets 

among housing, cash, savings, pensions, vehicles, and other assets.64 Not 

including the top quartile by wealth, savings and pensions, the portions of 

wealth that are invested in stocks and bonds are a small portion of overall

wealth, constituting no more than 20 percent of total gross assets per 

household. Among the bottom two quartiles by wealth, on average 

boomers have more of their wealth invested in their personal vehicle

(automobile or truck), which depreciates over time, than in either savings 

or pensions, assets that generally appreciate over time. Overall, the 

finding that most boomers do not hold a significant amount of financial

assets, measured both by account balance and by percentage of total 

assets, mitigates this generation’s potential effect on the asset markets as 

boomers retire and highlights the fact that many boomers may enter 

retirement without adequate personal savings.

 64 Cash consists of assets in checking, savings, and money market accounts, certificates of 

deposit, and U.S. Savings Bonds. Savings consists of assets held outside of an employersponsored retirement plan and invested in IRAs, Keogh plans, mutual funds, annuities, 

trusts, managed accounts, and publicly traded stocks and bonds. Pensions consist of 

assets held in an employer sponsored account type pension plan, such as a 401(k) or 403(b)

plan; defined benefit pensions are not included. Other assets not falling within the

categories defined above include business and investment real estate interests, collectibles 

of value, and jewelry.

Page 35 GAO-06-718 Baby Boom Generation
Figure 10: Allocation of Assets of Baby Boomers, by Wealth Quartiles 

0 

20 

40 

60 

80 

100 

Other 

Vehicles

Cash 

Pension 

Savings

Housing 

Q1 Q2 Q3 Q4 

Percentage 

Quartile 

Source: GAO analysis of 2004 Survey of Consumer Finances.

Note: Q1 refers to the bottom 25 percent of the population by wealth, while Q4 refers to the top 25 

percent of the population by wealth. 

Page 36 GAO-06-718 Baby Boom Generation
The uncertainties surrounding the future financial status of Social 

Security, the program which provides the foundation of retirement income 

for most retirees, also presents risks to baby boomers’ retirement 

security.65 These benefits are particularly valuable because they provide a 

regular monthly income, adjusted each year for inflation, to the recipient

and his survivors until death. Thus, Social Security benefits provide some 

insurance against outliving one’s savings and against inflation eroding the 

purchasing power of a retiree’s income and savings. Such benefits provide 

a unique retirement income source for many American households. 

Financial Stress on Social 

Security, Medicare, and 

Health Expenditures May 

Create Uncertainties for 

Some Baby Boomers and 

Future Generations 

Social Security, however, faces long-term structural financing challenges 

that, if unaddressed, could lead to the exhaustion of its trust funds. 

According to the intermediate assumption projections of Social Security’s 

2006 Board of Trustees’ Report, annual Social Security payouts will begin 

to exceed payroll taxes by 2017, and the Social Security trust fund is 

projected to be exhausted in 2040. Under these projections, without 

counterbalancing changes to benefits or taxes, tax income would be 

enough to pay only 74 percent of currently scheduled benefits as of 2040, 

with additional, smaller benefit reductions in subsequent years. 

These uncertainties are paralleled, if not more pronounced, with Medicare, 

the primary social insurance program that provides health insurance to 

Americans over age 65. Medicare also faces very large long-term financial 

deficits. According to the 2006 Trustees report, the Hospital Insurance 

Trust Fund is projected to exhaust itself by 2018. The challenges stem 

from concurrent demographic trends—people are living longer, spending 

more years in retirement, and have had fewer children—and from costs for 

health care rising faster than growth in the gross domestic product. These 

changes increase benefits paid to retirees and reduce the number of 

people, relative to previous generations, available to pay to support these 

benefits. 

These financial imbalances have important implications for future retirees’ 

retirement security. While future changes to either program are uncertain, 

addressing the financial challenges facing Social Security and Medicare 

may require retirees to receive reduced benefits, relative to scheduled

future benefits, while workers might face higher taxes to finance current 

 65 According to the 2004 SCF, about half of retirees receive at least half of their income 

from Social Security. For those in the lowest 60 percent of the income distribution, these 

benefits make up over three-quarters of their total income. For all retirees, Social Security 

accounts for about 40 percent of their total retirement income. See GAO-05-193SP. 

Page 37 GAO-06-718 Baby Boom Generation
benefits. In addition, some proposals to reform Social Security incorporate 

a system of individual accounts into the current program that would 

reduce scheduled benefits under the current system, perhaps with 

protections for retirees, older workers, and low-wage workers, and make 

up for those reductions to some degree with income from the individual 

accounts.66 Like DC plans generally, these accounts would give the 

individual not only the prospect for higher rates of return but also the risk 

of loss, placing additional responsibility and risk on individuals to provide 

for their own retirement security. Similarly, tax-preferred health savings 

accounts are a type of personal account to allow enrollees to pay for 

certain health-related expenditures. 

The worsening budget deficits that are expected to result if fiscal 

imbalances in Social Security and Medicare are not addressed could have 

important effects on the macroeconomy. By increasing the demand for 

credit, federal deficits tend to raise interest rates, which are mitigated to 

the extent that foreign savings flow into the United States to supplement 

scarce domestic savings. If foreigners do not fully finance growing budget

deficits, upward pressure on interest rates can reduce domestic 

investment in productive capacity. All else equal, these higher borrowing 

costs could discourage new investment and reduce the value of capital 

already owned by firms, which should be reflected in reduced stock prices 

as well. 

The fiscal challenges facing Medicare underscore the issue of rising retiree 

health costs generally. Rising health care costs have made health 

insurance and anticipated medical expenses increasingly important issues 

for older Americans. Although the long-term decline in the percentage of 

employers offering retiree health coverage has appeared to have leveled

off in recent years, retirees continue to face an increasing share of costs, 

eligibility restrictions, and benefit changes that contribute to an overall 

erosion in the value and availability of coverage. A recent study estimated

 66 Individual accounts would also try to increase revenues, in effect, by providing the

potential for higher rates of return on account investments than the trust funds would earn 

under the current system, but this exposes workers to a greater degree of risk. Some

proposals would create individual accounts without reducing promised benefits or 

increasing payroll taxes, relying instead on compensating decreased government spending, 

increased revenues, or increased borrowing from the public. Note that individual accounts

would generally not by themselves achieve solvency for the Social Security system. 

Achieving solvency requires more revenue, lower benefits, or both. See GAO, Social 

Security Reform: Considerations for Individual Account Design, GAO-05-847T (Washington,

D.C.: June 23, 2005). 

Page 38 GAO-06-718 Baby Boom Generation
that the percentage of after-tax income spent on health care will almost 

double for older individuals by 2030 and that after taxes and health care 

spending incomes may be no higher in 2030 than in 2000 for a typical older 

married couple. People with lower incomes will be the most adversely 

affected. The study projected that by 2030, those in the bottom 20 percent 

of the income distribution would spend more than 50 percent of their 

after-tax income on insurance premiums and out-of-pocket health care 

expenses, an increase of 30 percentage points from 2000.67 The costs of 

healthcare in retirement, especially long-term and end-of-life care, are a 

large source of uncertainty for baby boomers in planning their retirement 

financing, as typical private and public insurance generally does not cover

these services. Nursing home and long-term care are generally not covered

under Medicare but by Medicaid, which is the program that provides 

health insurance for low-income Americans. Medicaid eligibility varies 

from state to state, but generally requires that a patient expend most of 

their financial assets before they can be deemed eligible for benefits. Most 

private long-term care insurance policies pay for nursing home and athome care services, but these benefits may be limited, and few elderly 

actually purchase this type of coverage, with a little over 9 million policies 

purchased in the United States by 2002. Thus, health care costs may cause 

some baby boomers without long-term care insurance to rapidly spend 

retirement savings. 

Baby Boomers and Future 

Generations May 

Increasingly Rely on Their 

Own Investment 

Decisions, Highlighting 

Importance of Financial 

Literacy 

With more individuals being asked to take responsibility for saving for 

their own retirement in a DC pension plan or IRA, financial literacy and 

skills are becoming increasingly important in helping to ensure that 

retirees can enjoy a comfortable standard of living. However, studies have

found that many individuals have low financial literacy.68 A recent study of 

HRS respondents over age 50 found that only half could answer two 

simple questions regarding compound interest and inflation correctly, and

one-third could answer these two questions and another on risk 

diversification correctly. Other research by AARP of consumers age 45 and 

 67 See Richard W. Johnson and Rudolph G. Penner, “Will Health Care Costs Erode

Retirement Security?” Issue in Brief (Boston: Center for Retirement Research at Boston

College, 2004, No. 23.) 

68 GAO, Highlights of a GAO Forum: The Federal Government’s Role in Improving 

Financial Literacy, GAO-05-93SP (Washington, D.C.: Nov. 15, 2004). At this forum, experts 

suggested that the federal government should not make financial literacy a national priority

but should play a supportive role, given that a wide array of state, local, nonprofit, and 

private organizations provide financial education. 

Page 39 GAO-06-718 Baby Boom Generation
older found that they often lacked knowledge of basic financial and 

investment terms. Similarly, a survey of high school students found that 

they answered questions on basic personal finance correctly only about 

half of the time. 

Baby boomers approaching retirement and fortunate enough to have 

savings may still face risks from failing to diversify their stock holdings. In

one recent survey, participants perceived a lower level of risk for their 

company stock than for domestic, diversified stock funds.69 However, 

investors are more likely to lose their principal when investing in a single

stock as opposed to a diversified portfolio of stocks, because below 

average performance by one firm may be offset by above average 

performance by the others in the portfolio. In addition, holding stock 

issued by one’s employer in a pension account is even more risky because 

if the company has poor financial performance, it could result in both the 

stock losing value and the person losing his job. One consequence of this 

poor financial literacy may be investors holding a substantial part of their

retirement portfolio in employer stock. EBRI reported that the average 

401(k) investor age 40 to 49 had 15.4 percent of her portfolio in company 

stock in 2004; the average investor in his 60’s still had 12.6 percent of her 

assets in company stock.70 Perhaps of greater concern, the Vanguard 

Group found that, among plans actively offering company stock, 15 

percent of participants had more than 80 percent of their account balance 

in company stock in 2004.71

Our findings largely suggest that baby boomers’ retirement is unlikely to 

have a dramatic impact on financial asset prices. However, there appear to 

be other significant retirement risks facing the baby boom and future 

generations. The long-term financial weaknesses of Social Security and 

Medicare, coupled with the uncertain future policy changes to these 

programs’ benefits, and the continued decline of the traditional DB 

pension system indicate a shift toward individual responsibility for 

Concluding 

Observations 

 69 See John Hancock Financial Services, Defined Contribution Plan Survey: Insight into 

Participant Investment Knowledge and Behavior, 2002. 

70 Sarah Holden and Jack VanDerhei, “401(k) Plan Asset Allocation, Account Balances, and 

Loan Activity in 2004,” EBRI Issue Brief #285 (September 2005.) 

71 This figure includes only those plans in which Vanguard serves as the manager. Vanguard

Corporation, How America Saves 2005: A Report on Vanguard 2004 Defined

Contribution Plan Data (Valley Forge, Penn.: October 2005).

Page 40 GAO-06-718 Baby Boom Generation
retirement. These trends mean that rates of return will play an increasingly 

important role in individuals’ retirement security. For those with sufficient

income streams, this new responsibility for retirement will entail a lifetime 

of financial management decisions—from saving enough to managing such 

savings to generate an adequate stream of income during retirement, the 

success of which will directly or indirectly be dependent on rates of 

return. Given the potential impact of even a modest decline in returns over 

the long run on savings and income, market volatility, and uncertainties 

about pensions, Social Security, and Medicare, the onset of the baby boom 

retirement poses many questions for future retirement security. 

The performance of financial and other asset markets provides just one 

source of risk that will affect the retirement income security of baby 

boomers and ensuing generations. For those with financial assets, choices 

they make about investments play a critical role not just in having 

adequate savings at retirement but also in making sure their wealth lasts 

throughout retirement. That Americans are being asked to assume more 

responsibility for their retirement security highlights the importance of 

financial literacy, including basic financial concepts, investment 

knowledge, retirement age determination, and asset management in 

retirement. Government policy can help, policies that encourage 

individuals to save more and work longer (for those who are able) and that

promote greater education about investing and retirement planning that

can help ensure higher and more stable retirement incomes in the future. 

Although individual choices about saving and working will continue to 

play a primary role in determining retirement security, the high percentage

of boomers who have virtually no savings, assets, or pensions will face 

greater difficulties in responding to the new retirement challenges. For 

this group, the federal government will play an especially key role in 

retirement security through its retirement and fiscal policies. The 

challenges facing Social Security and Medicare are large and will only 

grow as our population ages. Legislative reforms to place Social Security 

and Medicare on a path towards sustainable long-term solvency would not 

only reduce uncertainty about retiree benefits, particularly for those 

Americans who own few or no assets, but also help address the federal

government’s long-term budget imbalances that could affect the economy 

and asset markets. Ultimately, retirement security depends on how much 

society and workers are willing to set aside for savings and retirement 

benefits and on the distribution of retirement risks and responsibilities 

among government, employers, and individuals. One of Congress’s 

greatest challenges will be to balance this distribution in a manner that 

Page 41 GAO-06-718 Baby Boom Generation
achieves a national consensus and helps Americans keep the promise of 

adequate retirement security alive in the 21st century. 

We provided a draft of this report to the Department of Labor, the 

Department of the Treasury, the Department of Housing and Urban 

Development, and the Social Security Administration, as well as several 

outside reviewers, including one from the Board of Governors of the 

Federal Reserve System. Labor, Treasury, and SSA and the outside 

reviewers provided technical comments, which we incorporated as 

appropriate. We are sending copies of this report to the Secretary of 

Labor, the Secretary of the Treasury, the Secretary of the Housing and 

Urban Development Department, and the Commissioner of the Social 

Security Administration, appropriate congressional committees, and other 

interested parties. We will also make copies available to others on request. 

In addition, the report will be available at no charge on GAO’s Web site at 

http://www.gao.gov. 

Agency Comments 

If you have any questions concerning this report, please contact Barbara 

Bovbjerg at (202) 512-7215 or George Scott at (202) 512-5932. Contact 

points for our Office of Congressional Relations and Public Affairs may be 

found on the last page of this report. GAO staff who made contributions 

are listed in appendix VI.

Barbara D. Bovbjerg, Director 

Education, Workforce, and Income Security Issues 

George A. Scott, Acting Director 

Financial Markets and Community Investment Issues 

Page 42 GAO-06-718 Baby Boom Generation
List of Congressional Committees

The Honorable Richard C. Shelby 

Chairman 

The Honorable Paul S. Sarbanes 

Ranking Minority Member 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

The Honorable Charles E. Grassley 

Chairman 

The Honorable Max Baucus 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The Honorable Susan M. Collins 

Chairman 

The Honorable Joseph I. Lieberman 

Ranking Minority Member 

Committee on Homeland Security and Governmental Affairs 

United States Senate 

The Honorable Gordon H. Smith 

Chairman 

The Honorable Herb Kohl 

Ranking Minority Member 

Special Committee on Aging 

United States Senate 

The Honorable George Miller 

Ranking Minority Member 

Committee on Education and the Workforce 

House of Representatives 

The Honorable Michael G. Oxley 

Chairman 

The Honorable Barney Frank 

Ranking Minority Member 

Committee on Financial Services 

House of Representatives 

Page 43 GAO-06-718 Baby Boom Generation
The Honorable Tom Davis 

Chairman 

The Honorable Henry A. Waxman 

Ranking Minority Member 

Committee on Government Reform 

House of Representatives 

The Honorable William M. Thomas 

Chairman 

The Honorable Charles B. Rangel 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 

The Honorable Jim McCrery 

Chairman 

The Honorable Sander M. Levin 

Ranking Member 

Subcommittee on Social Security 

House Committee on Ways and Means 

Page 44 GAO-06-718 Baby Boom Generation
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

To analyze whether the retirement of the baby boom generation is likely to 

precipitate a dramatic drop in financial asset prices, we relied primarily on 

information from two large survey data sets. We calculated the 

distribution of assets and wealth among baby boomers and existing 

retirees and bequest and work expectations of baby boomers from data 

from various waves of the Federal Reserve’s Survey of Consumer Finances 

(SCF). This triennial survey asks extensive questions about household 

income and wealth components; we used the latest available survey from 

2004 and previous surveys back to 1992. The SCF is widely used by the 

research community, is continually vetted by the Federal Reserve, and is

considered to be a reliable data source. The SCF is believed by many to be

the best source of publicly available information on U.S. household 

finances. 

Some caveats about the data should be kept in mind. Because some assets 

are held very disproportionately by relatively wealthy families, the SCF 

uses a two part sample design, one of which is used to select a sample 

with disproportionate representation of families more likely to be 

relatively wealthy. The two parts of the sample are adjusted for sample 

nonresponse and combined using weights to provide a representation of 

families overall. In addition, the SCF excludes one small set of families by 

design. People who are listed in the October issue of Forbes as being 

among the 400 wealthiest in the United States are excluded. To enable the 

calculation of statistical hypothesis tests, the SCF uses a replication 

scheme.1

 A set of replicate samples is selected by applying the key 

dimensions of the original sample stratification to the actual set of 

completed SCF cases and then applying the full weighting algorithm to 

each of the replicate samples. To estimate the variability of an estimate 

from the SCF, independent estimates are made with each replicate and 

with each of the multiple imputations; a simple rule is used to combine the

two sources of variability into a single estimate of the standard error. 

We also analyzed recent asset sales by retirees and work and bequest 

expectations of baby boomers, as well as gathered further financial 

information on baby boomers and older generations, from data from the 

Health and Retirement Study (HRS) from 1994 to 2004. The University of 

Michigan administers the HRS every 2 years as a panel data set, surveying

respondents every two years starting in 1992 about health, finances, family

 1

 See Arthur B. Kennickell, “Currents and Undercurrents: Changes in the Distribution of 

Wealth, 1989-2004,” SCF Working Papers, June 22, 2006. 

Page 45 GAO-06-718 Baby Boom Generation
Appendix I: Scope and Methodology 

situation, and many other topics. Like the SCF, the HRS is widely used by

academics and continually updated and improved by administrators. We 

also received expert opinions on the likely impact of the baby boom 

retirement on asset and housing markets from interviews with various 

financial management companies, public policy organizations, and 

government agencies, particularly those agencies dealing with housing. 

To assess the conclusions of academics researchers and outside experts 

on the financial impacts of the baby boom retirement, we read, analyzed, 

and summarized theoretical and empirical academic studies on the 

subject. Based on our selection criteria, we determined that these studies 

were sufficient for our purposes but not that their results were necessarily 

conclusive. We also interviewed financial industry representatives from 

mutual fund companies, pension funds, life insurance companies, brokerdealers, and financial industry trade associations. We also did our own 

analysis of the historical importance of demographics and other variables 

on stock returns by collecting demographic, financial, and macroeconomic 

data and running a regression analysis. We performed data reliability 

assessments on all data used in this analysis. 

To assess the role rates of return will play in providing retirement income 

in the future, we synthesized findings from the analysis of financial asset 

holdings to draw conclusions about the risk implications for different 

subpopulations of the baby boom and younger generations. We also used 

facts and findings on pensions and Social Security (from past GAO reports 

and the academic literature) and insights from interviews with outside 

experts to extend and support our conclusions. 

We conducted our work between August 2005 and June 2006 in 

accordance with generally accepted government auditing standards. 

Page 46 GAO-06-718 Baby Boom Generation
Appendix II: Bibliography of Simulation- Appendix II: Bibliography of Simulation- Based and Empirical Studies 

Based and Empirical Studies 

Abel, Andrew B. “Will Bequests Attenuate the Predicted Meltdown in 

Stock Prices When Baby Boomers Retire?” The Review of Economics and 

Statistics, vol. 83, no. 4 (2001): 589-595. 

Abel, Andrew B. “The Effects of a Baby Boom on Stock Prices and Capital 

Accumulation in the Presence of Social Security.” Econometrica, vol. 71, 

no. 2 (2003): 551-578. 

Ang, Andrew and Angela Maddaloni. “Do Demographic Changes Affect 

Risk Premiums? Evidence from International Data.” Journal of Business, 

vol. 78, no. 1 (2005): 341-379. 

Bakshi, Gurdip S. and Zhiwu Chen. “Baby Boom, Population Aging, and 

Capital Markets.” Journal of Business, vol. 67, no. 2 (1994): 165-202. 

Bergantino, Steven M. “Life Cycle Investment Behavior, Demographics, 

and Asset Prices.” Ph.D diss., Massachusetts Institute of Technology, 1998. 

Börsch-Supan, Axel. “Global Aging: Issues, Answers, More Questions.” 

Working Paper WP 2004-084. University of Michigan Retirement Research 

Center (2004). 

Börsch-Supan, Axel, Alexander Ludwig, and Joachim Winter. “Aging, 

Pension Reform, and Capital Flows: A Multi-Country Simulation Model.” 

Working Paper No. 04-65. Mannheim Research Institute for the 

Economics of Aging (2004). 

Brooks, Robin J. “Asset Market and Savings Effects of Demographic 

Transitions.” Ph.D diss., Yale University, 1998. 

Brooks, Robin. “What Will Happen to Financial Markets When the Baby 

Boomers Retire?” IMF Working Paper WP/00/18, International Monetary 

Fund (2000).

Brooks, Robin. “Asset-Market Effects of the Baby Boom and SocialSecurity Reform.” American Economic Review, vol. 92, no. 2 (2002): 402-

406. 

Brooks, Robin. “The Equity Premium and the Baby Boom.” Working 

Paper, International Monetary Fund, 2003. 

Page 47 GAO-06-718 Baby Boom Generation
Appendix II: Bibliography of SimulationBased and Empirical Studies 

Bütler, Monika, and Philipp Harms. “Old Folks and Spoiled Brats: Why the 

Baby-Boomers’ Savings Crisis Need Not Be That Bad.” Discussion Paper

No. 2001-42. CentER, 2001. 

Davis, E. Phillip and Christine Li. “Demographics and Financial Asset 

Prices in the Major Industrial Economies.” Working Paper. Brunel 

University, West London: 2003. 

Erb, Claude B., Campbell R. Harvey, and Tadas E. Viskanta. 

“Demographics and International Investments.” Financial Analysis 

Journal, vol. 53, no. 4 (1997): 14-28.

Geanakoplos, John, Michael Magill, and Martine Quinzii. “Demography and 

the Long-Run Predictability of the Stock Market.” Cowles Foundation 

Paper No. 1099. Cowles Foundation for Research in Economics, Yale 

University: 2004. 

Goyal, Amit. “Demographics, Stock Market Flows, and Stock Returns.” 

Journal of Financial and Quantitative Analysis, vol. 39, no. 1 (2004): 

115-142. 

Helmenstein, Christian, Alexia Prskawetz, Yuri Yegorov. “Wealth and 

Cohort Size: Stock Market Boom or Bust Ahead?” MPIDR Working Paper

WP 2002-051. Max-Planck Institute for Demographic Research, 2002. 

Lim, Kyung-Mook and David N. Weil. “The Baby Boom and the Stock 

Market Boom.” Scandinavian Journal of Economics, vol. 105, no. 3

(2003): 359-378. 

Macunovich, Diane. “Discussion of Social Security: How Social and Secure

Should It Be?” In Social Security Reform: Links to Saving, Investment, 

and Growth. Steven Sass and Robert Triest, eds., Boston: Federal Reserve

Bank of Boston (1997): 64-74. 

Poterba, James M. “Demographic Structure and Asset Returns.” The 

Review of Economics and Statistics, vol. 83, no. 4 (2001): 565-584. 

Poterba, James M. “The Impact of Population Aging on Financial Markets.” 

Working Paper 10851. Cambridge, Mass.: National Bureau of Economic 

Research, 2004. 

Yoo, Peter S. “Age Distributions and Returns of Financial Assets.” Working 

Paper 1994-002A. St. Louis: Federal Reserve Bank of St. Louis, 1994. 

Page 48 GAO-06-718 Baby Boom Generation
Appendix II: Bibliography of SimulationBased and Empirical Studies 

Yoo, Peter S. “Population Growth and Asset Prices.” Working Paper 1997-

016A. St. Louis: Federal Reserve Bank of St. Louis, 1997. 

Young, Garry. “The Implications of an Aging Population for the UK 

Economy.” Bank of England Working Paper no. 159. Bank of England, 

London: 2002. 

Page 49 GAO-06-718 Baby Boom Generation
Appendix III: Summary of the SimulationBased and Empirical Studies Assessing the

Impact of a Baby Boom on Financial Markets 

Table 2: Simulation-Based Studies Assessing the Impact of a Baby Boom on Financial Markets 

Study Objective Model Key assumptions Asset(s)

Channel through 

which baby boom 

affects asset 

returns Implications

Abel (2001 

and 2003) 

Assess the 

impact of a baby 

boom on the price 

of capital, with 

and without a 

bequest motive

Overlappinggenerations 

model, with 

agents living for 

two periods: 

working when

young but not 

when old 

Model assumes a 

closed economy, 

agents supply labor 

inelastically, and a 

convex adjustment 

cost technology for 

converting 

consumption goods 

into capital goods. In 

one scenario, the 

model assumes agents 

have no bequest 

motive. In the other, it 

assumes agents have 

a bequest motive, so 

they do not consume 

all of their wealth 

during retirement. 

Capital Baby boomers

affect the price of 

capital through their 

aggregate savings 

and, in turn, 

demand for assets. 

Assuming a bequest 

motive does not 

attenuate the 

reduction in the 

price of capital 

when baby boomers 

retire. Although 

retirees do not sell 

all of their capital, 

there is more capital 

in the economy,

because retirees 

save more when 

working in 

anticipation of 

leaving bequests. 

Model suggests 

that baby 

boomers will 

increase stock 

returns while in 

the labor force 

and will reduce

stock returns in 

retirement. 

Brooks (1998, 

2000, 2002, 

and 2003) 

Assess the 

impact of the 

baby boom on 

stock and bond

returns, including 

the equity 

premium 

Overlappinggenerations 

model, with 

agents living for 

four periods: 

childhood, young 

working age, old 

working age, and 

retirement 

Model assumes a 

closed economy, 

agents supply labor 

inelastically, and 

agents make a

portfolio decision over 

risky capital or safe 

bonds. In one 

scenario, model 

assumes agents do not 

receive social security 

benefits; in another 

scenario, it assumes 

they do. 

Risky 

capital and 

safe 

bonds 

Demographic shifts 

lead to changes in 

aggregate savings 

over time, causing 

the real interest rate 

to vary and, in turn, 

push stock and

bond returns in the 

same direction.

Changes in stock 

returns mirror wage 

income, which 

moves inversely 

with the size of the 

labor force and

reflects changes in 

the capital-labor

ratio. 

Model suggests 

that baby 

boomers will 

increase stock 

and bond returns 

while in the labor 

force and reduce 

stock and bond

returns but 

increase the 

equity premium in 

retirement. 

Appendix III: Summary of the SimulationBased and Empirical Studies Assessing the 

Impact of a Baby Boom on Financial Markets

Page 50 GAO-06-718 Baby Boom Generation
Appendix III: Summary of the SimulationBased and Empirical Studies Assessing the

Impact of a Baby Boom on Financial Markets 

Study Objective Model Key assumptions Asset(s)

Channel through 

which baby boom 

affects asset 

returns Implications 

BörschSupan, 

Ludwig, and 

Winter (2004)

Assess the 

effects of 

population aging 

and pension 

reform on 

international 

capital markets

Multi-country 

overlapping 

generations 

model 

Model assumes 

countries and regions 

are modeled 

symmetrically as open 

economies; 

demographic changes 

capture survival rates, 

immigration, and 

fertility rates; variable 

labor supply in some 

scenarios; and 

bequests are 

accidental. 

Capital Changes in

aggregate savings 

and labor supply 

affect the ratio of 

capital to labor and 

capital to output and 

hence the rate of 

return, where the 

rate of return to 

capital moves 

negatively with the 

capital-to-output 

ratio. 

Model suggests 

that baby 

boomers will 

increase stock 

returns while in 

the labor force 

and reduce stock 

returns in 

retirement. 

Bütler and

Harms (2001)

Assess the 

impact of a baby 

boom on the price 

of capital 

Overlappinggenerations 

model, with three 

living generations 

Model assumes a 

closed economy, 

agents have perfect 

foresight and leave no

bequests, economy 

produces a 

consumption good and 

physical capital, agents 

can transfer income 

across periods by 

buying bonds or

physical capital that is 

safe, labor supply is 

endogenous in some 

scenarios, and no 

social security exists. 

Bonds and 

physical 

capital that 

provides 

rent 

Due to their large 

size and impact on 

the capital-to-labor 

ratio, baby boomers 

depress the wage 

rate but prop up the 

return to capital

when working. In 

retirement, they 

contribute to a rise 

in the wage rate and 

depress the return 

to capital. 

Endogenous labor 

supply dampens

factor price 

fluctuations by 

allowing baby-boom 

parents and children

to shift their labor 

supply to take 

advantage of the 

baby boomers’

impact on the 

returns to capital 

and labor. 

Model suggests 

that baby 

boomers will 

increase stock 

returns while in 

the labor force 

and reduce stock 

returns in 

retirement. The 

swing in returns 

can be attenuated 

by the working 

and saving 

behavior of the

generations 

preceding and 

following the baby 

boomers. 

Page 51 GAO-06-718 Baby Boom Generation
Appendix III: Summary of the SimulationBased and Empirical Studies Assessing the

Impact of a Baby Boom on Financial Markets 

Study Objective Model Key assumptions Asset(s)

Channel through 

which baby boom 

affects asset 

returns Implications 

Geanakoplos, 

Magill, and 

Quinzii (2004) 

Assess the 

impact of the 

combination of 

life-cycle behavior 

and changing 

demographic 

structure on stock 

prices and the 

equity premium 

Overlappinggenerations 

model, with 

agents living for 

three periods: 

young adult, 

middle age, and 

retirement 

Model assumes a 

closed economy, 

agents supply labor 

inelastically, and a 

large cohort is 

deterministically

followed by a smaller 

cohort. It then adds 

other assumptions, 

including children, 

social security, 

bequests, uncertainty 

with wages and 

dividends, and capital 

stock with adjustment 

costs. 

Safe 

bonds 

and, in 

later 

versions of 

the model, 

equity 

contract 

representi

ng claims 

on capital 

In the basic model, 

demographic shifts 

lead to excess 

demand for 

consumption or

saving, requiring 

interest rates to 

change and, in turn, 

bond and equity 

prices to move 

inversely with such 

change. Model also 

shows that large

cohorts drive the 

terms of trade 

against themselves 

by being so 

numerous, favoring 

the small cohorts on 

the other side of the 

market that follow or 

precede them.

Model suggests 

that baby 

boomers will 

increase stock 

and bond returns 

while in the labor 

force and reduce 

stock and bond

returns but 

increase the 

equity premium in 

retirement. 

Helmenstein,

Prskawetz, 

and Yegorov

(2002) 

Assess the effect 

of population 

aging on the 

financial markets 

when wealth is

unevenly 

distributed 

Theoretical 

model, with 

economic 

behaviors 

assumed rather 

than derived from 

optimizing agents 

Model assumes wealth 

accrues from bequests 

and savings, which are 

accumulated as a 

fraction of wage

income; and the 

population is divided 

into different 

generations, each of 

which has equal 

amount of wealth but is 

composed of low and 

high-wealth individuals. 

High-wealth individuals 

receive a bequest at 

age 20, hold their 

wealth in stocks, 

consume only labor 

income, and work their 

entire lives; low-wealth 

individuals follow the 

life-cycle hypothesis. 

Safe 

bonds and 

stock that 

is also 

safe 

In the model where 

wealth is uniformly 

distributed among 

high-wealth 

individuals, the

increase in demand 

for stocks and 

bonds by baby 

boomers when in 

the work force 

causes prices to 

rise. Likewise, the 

spending of savings 

by baby boomers in 

retirement causes 

prices to decline. 

Model suggests 

that baby 

boomers will 

increase stock 

and bond returns 

while in the labor 

force and reduce 

stock and bond

returns in 

retirement. The 

decline in returns, 

however, could

be attenuated if

wealth is not 

evenly distributed.

Page 52 GAO-06-718 Baby Boom Generation
Appendix III: Summary of the SimulationBased and Empirical Studies Assessing the

Impact of a Baby Boom on Financial Markets 

Study Objective Model Key assumptions Asset(s)

Channel through 

which baby boom 

affects asset 

returns Implications 

Lim and Weil 

(2003) 

Assess the 

impact of the 

baby boom on 

stock prices 

Macrodemographic 

model of linked

dynasties 

Model assumes 

production and

investment are carried 

out by identically 

competitive firms that 

maximize the present 

discounted values of 

their cash flows; firms 

making investments 

face installation costs 

that are a positive 

function of the ratio of 

investment to capital; 

closed economy; and 

labor supply is 

exogenous. 

Capital Demographics

affect stock prices 

through the 

installation cost of 

capital. As capital is 

the only savings 

vehicle, greater

savings drives up 

the price of capital. 

The larger the 

adjustment costs, 

the larger are the 

movements in stock 

prices. 

Model suggests 

that baby 

boomers will 

increase stock 

returns while in 

the labor force 

and reduce stock 

returns in 

retirement. 

Yoo (1997) Assess the 

impact of a baby 

boom on asset

prices 

Overlappinggenerations 

model, with 

agents living for 

55 periods and

receiving an agedependent 

endowment 

during the first 45 

periods 

Model assumes a 

closed economy, an 

agent’s demand for an 

asset does not 

respond to 

expectations of future 

prices, supply of 

capital is fixed, and 

agents supply labor 

inelastically. The 

model later relaxes 

assumptions about 

expectations of future 

prices and the fixed 

supply of capital. 

Capital Variation in a 

population’s age

distribution affects 

the aggregate 

demand for an 

asset by changing 

the distribution of 

asset holders. This 

variation in 

aggregate demand 

for an asset 

produces the 

relationship 

between a 

population’s age

distribution and

asset prices. 

Model suggests 

that baby 

boomers will 

increase stock 

returns while in 

the labor force 

and reduce stock 

returns in 

retirement. The 

effect is 

attenuated if the 

supply of capital 

varies. 

Page 53 GAO-06-718 Baby Boom Generation
Appendix III: Summary of the SimulationBased and Empirical Studies Assessing the

Impact of a Baby Boom on Financial Markets 

Study Objective Model Key assumptions Asset(s)

Channel through 

which baby boom 

affects asset 

returns Implications 

Young (2002) Assess the 

impact of a baby 

boom and other

demographics 

shocks on asset 

prices 

Overlappinggenerations 

model 

Model assumes agents 

will save for old age, 

but some will die 

before old age, with 

their savings being 

bequeathed to the next 

generation; agents 

supply labor 

exogenously in varying 

amounts and degrees 

of effectiveness over 

their lifetime; agents 

can hold assets that 

pay a rate of return, 

and receive bequests; 

agents live up to five 

periods and consume 

a decreasing amount 

of their wage income in 

each period. 

Capital The baby boom

increases labor

supply and lowers 

the capital-to-labor 

ratio, raising the 

marginal product of 

capital and interest 

rate and reducing 

the marginal 

product of labor and 

wage rate. When 

baby boomers are 

in the work force, 

aggregate savings 

is raised; thus, 

when boomers

retire, the raised

capital drives down 

the interest rate on 

retirement. 

Model suggests 

that baby 

boomers will 

increase stock 

returns while in 

the labor force 

and reduce stock 

returns in 

retirement. 

Source: GAO summary of studies. 

Table 3: Empirical Studies Assessing the Impact of a Baby Boom on Financial Markets 

Study Objective

Demographic

variable(s) Asset variable(s) 

Time frame of

analysis Key results 

Ang and 

Maddaloni

(2003) 

Tests for associations 

between demographic 

variables and equity 

premium in the United 

States and other 

countries 

Average age of 

population above 20 

years old 

Percentage of the 

population age 65 

and over 

Percentage of the 

population in the 

working ages of 20 to 

64 

Difference between 

the compounded total 

return of the stock 

market index and 

compounded return 

on a risk-free asset 

1900-2001 for the 

United States, 

France, Germany, 

and United Kingdom; 

1920-2001 for Japan 

Demographic 

changes predicted 

future changes in the 

equity premium in the 

international data but 

only weakly in the 

U.S. data. 

Bakshi and

Chen (1994) 

Tests for associations 

between demographic 

variable and equity 

premium 

Average age of 

population over age 

20 

Excess return on S&P 

500 stock index 

1946 to 1990 In the United States, 

increases in the 

average age of

persons older than 

age 20 predicted a 

higher risk premium. 

Page 54 GAO-06-718 Baby Boom Generation
Appendix III: Summary of the SimulationBased and Empirical Studies Assessing the

Impact of a Baby Boom on Financial Markets 

Study Objective

Demographic

variable(s) Asset variable(s) 

Time frame of

analysis Key results 

Bergantino

(1998) 

Tests for associations 

between demographic 

variables and (1) 

stock and bond prices 

and (2) equity 

premium in the United 

States 

Growth in the 

demographic demand

for financial assets 

constructed from time 

series of crosssectional profiles of 

stock and bond

holdings 

Ratio of demographic 

demand for stocks to 

demographic demand

for bonds 

Average annual rate 

of real price 

appreciation of (1) the 

S&P 500 stock index 

and (2) long-term 

government bonds 

1946 to 1997 In the United States, 

the increase in the 

demand for stocks 

and bonds based on 

demographic changes 

increased stock and 

bond prices but had 

no effect on the equity 

premium. 

Brooks (1998) Tests for associations 

between demographic 

variables and (1) 

stock and bond prices 

and (2) stock prices 

relative to bond prices 

in the United States 

and other countries 

Population age 40 to 

64 divided by rest of 

the population 

Population age 40 to 

64 divided by 

population age 65 

and older 

Logged annual (1) 

stock price indices for 

a cross-section of 

countries and (2) 

price indices for 

bonds based on

yields to maturity of 

long-term government 

bonds 

1950 to 1995 The increase in

people age 40 to 64 

relative to the rest of 

the population 

increased stock and 

bond prices, 

particularly in the 

United States. Also, 

the increase in people 

40 to 64 relative to 

people over 65

increased the equity 

premium. 

Davis and Li

(2003) 

Tests for associations 

between demographic 

variables and stock 

and bond prices in the 

United States and 

other countries

Percentage of the 

population (1) age 20

to 39 and (2) age 40 

to 64 

Change in annual 

average level of (1) 

real stock price index 

(excluding dividends) 

and (2) real long-term 

bond yield 

1950 to 1999 for 

stocks; 1960 to 1999 

for bonds 

The relative increase 

in people age 40 to 

64 increased stock 

prices and decreased

long-term bond yields 

in the United States 

and other countries. 

Geanakoplos, 

Magill, and 

Quinzii (2004) 

Tests for associations 

between demographic 

variable and financial 

asset prices and

returns in the United 

States and other 

countries 

Ratio of population 

age 40 to 49 to

population age 20 to 

29 

Price-to-earnings 

ratio, real return on 

S&P 500 stock index, 

real short-term 

interest rate, and real

stock price index of 

foreign countries 

1910 to 2002 for the 

United States; 1950 

to 2001 for the foreign 

countries 

In the United States, 

the relative increase 

in the population age 

40 to 49 increased 

stock returns. The 

results for the other 

countries included in

the study were mixed.

Goyal (2004) Tests for, among 

other things, 

associations between 

demographic 

variables and the 

equity premium 

Percentage change 

and level of 

population age 25 to 

44, age 45 to 64, and 

age 65 and over. 

Average age of 

person over age 25 

Difference between 

logged S&P 500 stock 

returns and logged 

Treasury bill rate 

1926 to 1998 In the United States, 

the relative increase 

in persons age 45 to 

64 increased the 

equity premium. 

Page 55 GAO-06-718 Baby Boom Generation
Appendix III: Summary of the SimulationBased and Empirical Studies Assessing the

Impact of a Baby Boom on Financial Markets 

Study Objective

Demographic

variable(s) Asset variable(s) 

Time frame of

analysis Key results 

Macunovich 

(1997) 

Tests for associations 

between demographic 

variables and stock 

prices 

Logged annual

change in U.S.

population age 6, 9, 

18, 27, 45, 66, and 

total U.S. population 

3-year moving 

average of the annual 

change in the Dow 

Jones Industrial

Average 

1934 to 1994 In the United States, 

the increase in people 

age 45 and 66 

decreased stock 

returns. 

Poterba 

(2004) 

Tests for associations 

between demographic 

variables and stock 

and bond returns in 

the United States 

Percentage of 

population age 40 to 

64; percentage of 

population over age 

65; population age 40

to 64 divided by

population age 20 

and older; and 

population over age 

65 divided by 

population age 20 

and older 

Annual real returns 

for Treasury bills, 

long-term government 

bonds, and large 

corporate stocks 

based on S&P 500 

1926 to 2003 for 

United States 

In the United States, 

the relative increase 

in people age 40 to 

64 decreased shortterm government 

bond returns but had 

no effect on long-term 

government bond or 

stock returns. 

Yoo (1994) Tests for associations 

between demographic 

variables and stock 

and bond returns 

Percentage of 

population age 25 to 

34, age 35 to 44, age 

45 to 54, and age 65 

and over 

Annual real returns of 

common stock, small 

company stock, longterm corporate bonds, 

long-term government 

bonds, intermediateterm government 

bonds, and Treasury 

bills 

1926 to 1988 In the United States, 

the relative increase 

in people age 45 to 

54 decreased annual 

returns of short and 

intermediate-term 

government bonds 

but had no effect on 

the annual returns of 

stock and long-term 

government or 

corporate bonds. 

Source: GAO summary of studies. 

Page 56 GAO-06-718 Baby Boom Generation
Appendix IV: E

Impact of 

Returns 

conometric Analysis of the 

Demographics on Stock Market 

Page 57 GAO-06-718

Appendix IV: Econometric Analysis of the 

Impact of Demographics on Stock Market 

Returns 

This appendix discusses our analysis of the impact of demographics and 

macroeconomic and financial factors on U.S. stock market returns from 

1948 to 2004. In particular, we discuss (1) the development of our model 

used to estimate the relative importance of demographics and other 

factors in determining stock market returns, (2) the data sources, and (3) 

the specifications of our econometric model, potential limitations, and 

results. 

GAO’s Econometric Model 

of the Effects of 

Demographic, 

Macroeconomic, and 

Financial Factors on Stock 

Market Returns 

We developed an econometric model to determine the effects of changes

in demographic, macroeconomic, and financial variables on stock market 

returns from 1948 to 2004. Our independent empirical analysis is meant to 

address two separate but related questions: 

• Are the demographic effects on stock returns found in some of the 

empirical literature1

 still apparent when additional control variables—

macroeconomic and financial indicators known to be associated with 

stock returns—are present in the regression analysis? 

• How much of the variation in stock returns is explained by those 

macroeconomic and financial indicators as compared to demographic 

variables? 

Answering the first question serves to address the possibility of omitted 

variable bias in simpler regression specifications. For example, studies by 

Poterba;2

 Geanakoplos, Magill, and Quinzii (hereafter, GMQ); and Yoo3 use 

only demographic variables as their independent variables. The omission 

of relevant variables in regressions of this kind will result in biased 

 1

 From our literature review, studies that found evidence of a relationship between 

demography and stock returns include Robin J. Brooks, “Asset Market and Savings Effects 

of Demographic Transitions,” Ph.D diss., Yale University (1998); E. Phillip Davis and 

Christine Li, “Demographics and Financial Asset Prices in the Major Industrial Economies,” 

Working Paper (Brunel University, West London: 2003); and John Geanakoplos, Michael 

Magill, and Martine Quinzii, “Demography and the Long-Run Predictability of the Stock 

Market,” Cowles Foundation Paper No. 1099 (New Haven, Conn.: Cowles Foundation for

Research in Economics, Yale University, 2004). While Davis and Li include a set of control

variables, Brooks’ international approach captures only a global business-cycle component.

Geanakoplos, Magill, and Quinzii do not include control variables.

2

 James M. Poterba, “The Impact of Population Aging on Financial Markets,” Working 

Paper No. 10851 (Cambridge, Mass.: National Bureau of Economic Research, 2004). 

3

 Peter S. Yoo, “Age Distributions and Returns of Financial Assets,” Working Paper 1994-

002A (St. Louis: Federal Reserve Bank of St. Louis, 1994). 

Baby Boom Generation
Appendix IV: Econometric Analysis of the 

Impact of Demographics on Stock Market 

Returns 

estimates of the size and significance of the effects under investigation. 

Answering the second question serves to put the influence of

demographics on stock returns in perspective: How much of stock market 

movements are explained by demographics as opposed to other variables?

To answer the questions we include a series of demographic variables 

from the literature we reviewed in a multivariable regression model. We 

relied primarily on information in a seminal study done by Eugene Fama 

to develop our model.4

Data and Sample Selection We analyzed the determinants of real (adjusted for inflation) total 

(including both price changes and dividends) returns of the Standard and 

Poor’s (S&P) 500 Index from 1948 to 2004. We chose the S&P 500 Index as

our dependent variable not only because it is widely regarded as the best 

single gauge of U.S. equities market and covers over 80 percent of the 

value of U.S. equities but also because S&P 500 Index mutual funds are by 

far the largest and most popular type of index fund. Due to changes in the 

structure of financial markets over time, we chose a shorter time horizon 

to minimize the likelihood of a structural break in the data.5

 For our 

independent variables, we selected macroeconomic and financial variables 

that economic studies have found to be important in explaining stock 

returns and were used in Fama’s analysis to determine how much of stock

market variation they explained.6

 We selected two demographic variables, 

the proportion of the population age 40-64 and the ratio of the population

age 40-49 to the population age 20-29 (the middle-young or “MY” ratio), 

that had statistically significant coefficients in several of the empirical 

studies that we reviewed.7

 Table 1 presents the independent and 

dependent variables in our model and their data sources. For consistency, 

we estimate the equation four times using both levels and changes in the 

two demographic variables. 

 4

 Eugene Fama, “Stock Returns, Expected Returns, and Real Activity,” Journal of Finance, 

vol. 45, no. 4 (1990). 

5

 A Chow test confirms that there are no structural breaks around the midpoint (1976) in

any of the regressions, but there is probably a structural break after 1980 in the baseline 

(Fama) regression 

6

 See Fama (1990). 

7

 See Brooks (1998), Davis and Li (2003), and Geanakoplos, Magill, and Quinzii (2004). 

Page 58 GAO-06-718 Baby Boom Generation
Appendix IV: Econometric Analysis of the 

Impact of Demographics on Stock Market 

Returns 

Table 4: Names, Definitions and Data Sources of Variables Used in Our Regression

Models

Dependent variable 

Stock Returns Real annual returns to the S&P 500 Index from 

Robert Shiller’s calculations 

Independent variables 

Control Variables 

Dividend yield Dividends paid to shares of stocks in the S&P 500 

Index, divided by the share price, from Moody’s 

Economy.com (lagging) 

Term spread The difference between yields on Moody’s AAA 

corporate bonds and the 3-month T-bill, from the 

Federal Reserve Bank of St. Louis (lagging)

Default spread shock Unexpected changes to the difference between 

Moody’s BAA and AAA corporate bonds, calculated

as residuals from an AR(1) regression, from the 

Federal Reserve Bank of St. Louis 

Industrial production Industrial Production Index of U.S. manufacturing, 

mining, and electric and gas utilities, from the Board 

of Governors of the Federal Reserve (leading)

a

Demographic variables 

Middle age-to-young (MY) ratio Ratio of individuals in the United States ages 40 to 49 

over 20 to 29, from the U.S. Census Bureau 

Proportion 40-64 Proportion of individuals in the U.S. ages 40-64, from 

the Census Bureau 

Source: GAO analysis of S&P 500 returns, 1948-2004. 

a

For industrial production, because it is leading, we assume that the causality is wholly from growth in 

industrial production to stock returns, and not vice versa. This is consistent with the literature, as

expressed in Nai-Fu Chen, Richard Roll, and Stephen A. Ross, “Economic Forces and the Stock 

Market,” Journal of Business, vol. 59, no. 3 (1986), “stock prices are usually considered as 

responding to external forces.” Further, in Paul Beaudry and Franck Portier, “Stock Prices, News and 

Economic Fluctuations,” Working Paper 10548 (Cambridge, Mass.: National Bureau of Economic 

Research, 2004), the authors find that stock prices respond today to news about productivity shocks 

that will effect the economy with a substantial delay. This implies that higher industrial production in 

the future should cause higher stock returns today. 

Model Specification, 

Limitations, and 

Estimation 

We estimated the following regression equation:

rt = β0 + β1x1,t-1 + β2x2,t-1 + β3x3,t + β4x4,t+1 + θyt + εt

where rt is real stock market returns during calendar year t, xi are four 

control variables (the dividend yield, the term spread, shocks to the 

Page 59 GAO-06-718 Baby Boom Generation
Appendix IV: Econometric Analysis of the 

Impact of Demographics on Stock Market 

Returns 

default spread, and growth of industrial production, respectively) adapted 

from Fama’s study,8 yt

 is the demographic variable, and εt is the error at 

time t. The error structure is modeled assuming White’s 

heteroskedasticity-consistent covariance matrix. We first estimate the 

equation without a demographic variable to measure the proportion of 

variation explained by macroeconomic and financial indicators, followed 

by estimating the regression equation four separate times to include each 

of the demographic measures.9

 For the benchmark model, we find no 

evidence of serial autocorrelation or deviations from normality.10

Despite standard diagnostics and careful regression specification, some 

limitations of our analysis remain. We cannot be certain that we have 

chosen the best variables to represent the aspects of the economy that 

move the stock market or the demographic variables that may influence 

stock returns as well. We have attempted to choose appropriate variables 

based on the existing empirical and theoretical literature on the economic

and demographic determinants of stock returns. Nevertheless, even these 

variables may be measured with error. Generally, measurement errors 

would cause us to underestimate the importance of those variables that 

have been measured with error. This would be most problematic in the

case of our demographic variables, though measurement error in our 

economic and financial control variables actually makes our estimates 

conservative. Nevertheless, we assessed the reliability of all data used in 

this analysis, and found all data series to be sufficiently reliable for our 

purposes. As a result, we believe that the limitations mentioned here (and

related to the direction of causality in industrial production mentioned 

above) do not have serious consequences for the interpretation of our 

results. 

 8

 See Fama (1990). 

9

 By including the variables in this order, we are measuring the contribution of 

demographics to the R-squared after controlling for macroeconomic and financial 

variables. We replicated the results instead including the demographic variables first, and

found that they accounted for even less of the variation in stock returns, around 1.8 percent

on average, compared to an average of roughly 5.7 percent when macroeconomic and

financial variables were included first. 

10 The presence of serial autocorrelation or deviations from normality would imply that the 

methods we used to measure statistical significance (e.g., p-values) were inappropriate, 

and could thus lead to incorrect conclusions about the strength of relationships between

variables. 

Page 60 GAO-06-718 Baby Boom Generation
Appendix IV: Econometric Analysis of the 

Impact of Demographics on Stock Market 

Returns 

The regression results are presented in tables 2 through 6 below. Our 

results are consistent with the literature on the determinants of stock 

market returns, especially Fama’s study, in that several of our 

macroeconomic and financial variables are statistically significant, and 

they account for a substantial proportion (roughly 47 percent) of the 

variation in stock returns. The coefficient of determination in Fama’s 

study could be higher due to the inclusion of more industrial production 

leads. 

The finding in Davis and Li’s study that the 40-64 population had a 

statistically significant impact on stock returns is not robust to alternative 

specifications, as demonstrated in Table 6. The proportion of the 

population 40-64 is no longer a statistically significant determinant of 

stock returns, and the inclusion of the variable improves the R-squared by

less than 1.5 percent. However, changes in the 40-64 population are 

significant, and account for an additional 8 percent of the variation in 

stock returns. 

The MY ratio and changes in the MY ratio are statistically significant, as 

seen in Tables 5 and 6, and the model with changes in the MY ratio 

accounts for a higher proportion of the variation in stock returns than the 

model estimated with the level of the ratio.11

Table 5: Stock Market Returns Regression Results—Baseline Model 

Parameter Estimate p-value

Intercept -0.104809 0.0636

Dividend yield 0.024963 0.0462

Term spread 0.012387 0.4650

Shocks to the default spread -0.105986 0.1698

Industrial production 2.097360 <0.0001

R-squared 0.465597 NA

Source: GAO analysis of S&P 500 returns, 1948-2004. 

 11 Changes in the “MY” ratio were used by Geanakoplos, Magill, and Quinzii (2004). 

Page 61 GAO-06-718 Baby Boom Generation
Appendix IV: Econometric Analysis of the 

Impact of Demographics on Stock Market 

Returns 

Table 6: Stock Market Returns Regression Results—Middle Age Model 

Parameter Estimate p-value

Intercept -0.549744 0.2546

Dividend yield 0.036523 0.0095

Term spread 0.013526 0.4516

Shocks to the default spread -0.109996 0.2196

Industrial production 2.031814 <0.0001

Proportion middle aged (40-64) 1.513299 0.3610

Change in R-squared 0.014389 NA

Source: GAO analysis of S&P 500 returns, 1948-2004. 

Table 7: Stock Market Returns Regression Results—Change in Middle Age Model 

Parameter Estimate p-value

Intercept -0.201542 0.0008

Dividend yield 0.053588 0.0004

Term spread -0.002828 0.8802

Shocks to the default spread -0.095472 0.2514

Industrial production 2.056497 <0.0001

Change in proportion middle aged (40-64) 27.52932 0.0044

Change in R-squared 0.080823 NA

Source: GAO analysis of S&P 500 returns, 1948-2004. 

Table 8: Stock Market Returns Regression Results—Middle-Young Ratio Model 

Parameter Estimate p-value

Intercept -0.467783 0.0094

Dividend yield 0.052177 0.0003

Term spread 0.026824 0.2163

Shocks to the default spread -0.167018 0.1369

Industrial production 1.877306 <0.0001

MY ratio (age 40-49/ age 20-29) 0.286547 0.0409

Change in R-squared 0.055683 NA

Source: GAO analysis of S&P 500 returns, 1948-2004. 

Page 62 GAO-06-718 Baby Boom Generation
Appendix IV: Econometric Analysis of the 

Impact of Demographics on Stock Market 

Returns 

Table 9: Stock Market Returns Regression Results—Change in Middle-Young Ratio 

Model 

Parameter Estimate p-value

Intercept -0.055320 0.3315

Dividend yield 0.017724 0.1314

Term spread -0.006925 0.7323

Shocks to the default spread -0.102432 0.1668

Industrial production 2.227720 <0.0001

Change in MY ratio (age 40-49/ age 20-29) 1.903652 0.0064

Change in R-squared 0.079029 NA

Source: GAO analysis of S&P 500 returns, 1948-2004. 

Page 63 GAO-06-718 Baby Boom Generation
Appendix V: 

A

GAO Contact and Staff 

cknowledgments 

Page 64 GAO-06-718

Appendix V: GAO Contact and Staff 

Acknowledgments 

Barbara D. Bovbjerg (202) 512-7215

George A. Scott (202) 512-5932 

In addition to the contacts above, Kay Kuhlman, Charles A. Jeszeck, 

Joseph A. Applebaum, Mark M. Glickman, Richard Tsuhara, Sharon 

Hermes, Michael Hoffman, Danielle N. Novak, Susan Bernstein, and Marc

Molino made important contributions to this report. 

Contacts 

Staff 

Acknowledgments 

(130493) Baby Boom Generation
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER