"The assumption is that our wealth does us little or no good after we're dead," said Steven Sass, a research economist at the Center for Retirement Research at Boston College and author of a recent research brief on the effect of surging retirement on investment returns.
However, Sass says these assumptions are too simplistic and also at odds with data on retiree spending. Rather than devoting their funds to traveling, buying second homes and otherwise further gilding their golden years, he says, retirees tend to be frugal. That's especially true of the wealthy who hold most retirement assets, but less-wealthy retirees worried about running out also restrain expenditures.
"The elderly don't like to spend down," Sass said.
So if retirees don't spend their savings, wouldn't that help returns? Not according to this model. In the short term, retirees who hang on to investments while younger folks are saving for retirement will see rising asset prices, Sass said. Long-term, however, the greater supply of savings will reduce returns.
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This effect will be aggravated by minimal labor force growth as boomers stop working. A stagnant labor force will restrain economic activity and the need for money to fund roads, shopping centers and factories. And that, according to this model, which is gaining currency with economists, will further reduce returns.
"The demand for investment dollars could ease at a time when a high level of savings is competing for investment returns," said Russell Price, senior economist at Ameriprise Financial in Minneapolis. "Ultimately, this scenario would lower the expected returns overall."
Price says this scenario is already playing out, and that demographic factors are behind slower than expected economic growth since the last recession. However, it's not certain whether or how strongly it will continue. A key unknown is whether Social Security benefits will be reduced.
"Innovation, productivity, structural factors and policies, as well as many other factors, can overcome demographic considerations over very long periods of time," Price added.