Does a Large Retiree Population Affect Investment Returns?

In analyzing relationships between the age structure of the population and investment returns, the researchers found some evidence that a population with more retirees than workers increases the supply of savings and drives down investment returns, according to a compilation of research reviewed in a recent issue brief by the Center for Retirement Research at Boston College (CRR).

How Will Retirees Affect Investment Returns?” reviews various studies on what effect the ongoing transition to an older society with a larger share of retirees could have on private savings and investment returns.

The CRR notes that it is unclear how strong this “downward pressure” on investment returns would be, but it would be less intense if retirees drew down more of their savings and if Social Security benefits remain at their current level, as workers would not need to accumulate more savings than they currently have to support themselves in retirement.

The brief suggests that the demographic transition is expected to affect the supply and demand for savings by reducing the growth of the working-age population and by changing the overall age composition of the population. It notes that the “sharp deceleration in the growth of the working-age population means that the economy needs far less savings to build new offices, factories, roads, and machinery than it had when the labor force was rapidly expanding.” Accordingly, this decline in the demand for savings should lower investment returns, the brief surmises.

The brief explains that the demographic transition is largely responsible for Social Security’s long-term financing shortfall. If it reduces investment returns, it will also weaken private savings as the other component of the nation’s retirement income system, forcing workers to save more than they currently do to maintain their standard of living in retirement. “Such a significant increase in the supply of savings, and especially in the supply of savings per worker, would clearly put downward pressure on investment returns,” the brief concludes.

In reviewing studies that used historical data to identify relationships between the age structure of the population and investment returns, CRR notes that some studies find evidence that an increase in the share of young workers increases the demand for savings and drives up the income generated by a dollar invested in stocks or bonds, consistent with the lifecycle hypothesis. In addition, studies also find some evidence that an increase in the share of older workers increases the supply of savings and drives down investment returns, also consistent with the lifecycle hypothesis.

In contrast, other studies reach the opposite conclusion. The brief suggests that the empirical evidence on the effect of the age structure is “hardly robust” and the results are sensitive to the period analyzed, the countries in the sample, and changes in variable definitions and modeling assumptions.

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