What will happen to financial markets when the baby boomers retire?

Build confidence in a range of key essay writing techniques and skills with this practical companion, full of advice and guidance from experienced EE experts.· Build essay writing techniques and skills through a range of strategies, serving as a useful companion throughout the writing process - from the development of a research question, critical-thinking, referencing and citation to reflecting on the process and final essay· Concise, clear explanations help you navigate the IB requirements, including advice on assessment objectives and academic honesty· Learn what is required to get the best EE grades and write an excellent essay with detailed examiner advice and expert tips and hints, including common mistakes to avoid · Explicit reference to the IB Learner profile and the importance of reflection. Paul Hoang is Vice Principal at Sha Tin College, English Schools Foundation in Hong Kong. He writes for Business Review, published by Philip Allan. He is a member of the editorial board for IB Review, Philip Allan's flagship publication for the IB. Paul is the author of several publications including Economics for the IB Diploma Revision Guide (Hodder Education), IB Business Management, 3rd edn (IBID Press), IGCSE Business Studies for Edexcel (Anforme), and Cambridge IGCSE and O Level Economics (Hodder Education). He is an IB examiner and has over 10 years of experience as an IB Workshop Leader.Chris Taylor is Extended Essay Coordinator at Sha Tin College - an international school and IB World School with over 1200 students. He teaches IB History and has examined the EE component of the Diploma for over 10 years. Chris authored Riding the Dragon (2013), a book that details his visits to every province in China and the culture, history and people in each of these. He is a regular contributing author of IB Review magazine, specialising in IB History and the Extended Essay. Having visited many countries, Chris is also a travel writer for the South China Morning Post, Hong Kong's leading English language newspaper. Contents I. Introduction II. The Paper vis-a-vis the Literature III. The Model IV. Equilibrium V. The State Variables VI. The Solution Method VII. Accuracy of the Solution Method VIII. Model Parameterization IX. Simulation Results X. Simulating a Baby Boom-Baby Bust XI. Conclusion Text Tables 1. The Age Distribution over Time 2. Steady State Values for the Model without Uncertainty 3. Descriptive Statistics of the Consumption-Saving Model 4. Correlations based on Third-Order Approximation 5. Descriptive Statistics of the Consumption-Investment Model 6. Correlations based on Third-Order Approximation using (4) 7. Descriptive Statistics of the Consumption-Investment Model with Social Security 8. Correlations based on Third-Order Approximation 9. Descriptive Statistics of the Consumption-Investment Model using (4') 10. Correlations based on Third-Order Approximation 11. Correlations based on Third-Order Approximation Figures 1. Population Growth 2. Returns on Capital and the Riskless Asset 3. Wage Income 4. Return Differential between Stocks and Bonds 5. Per Capita Consumption of Young Workers 6. Per Capita Equity Holding of Young Workers 7. Per Capita Bond Holding of Young Workers 8. Per Capita Equity Holding of Old Workers 9. Per Capita Bond Holding of Old Workers 10. Ratio of Old to Young Workers 11. Per Capita Consumption of Retirees 12. Discounted Lifetime Utility 13. Wage Income 14. Workers per Retiree 15. Per Capita Retirement Benefit 16. Returns on Capital and the Riskless Asset 17. Wage Income 18. Return Differential between Stocks and Bonds 19. Per Capita Consumption of Retirees 20. Discounted Lifetime Utility References This paper explores the effects of changes in the age distribution on returns to financial assets. The aging of the baby boomers and speculation over possible effects on financial markets has raised the profile of this issue, both in the financial press and in academic circles. 2 Broadly speaking, there are two opposing views. The first holds that retiring baby boomers will be selling their assets to a smaller generation of young investors. This will drive asset prices down, leaving baby boomers with a smaller nest-egg than anticipated. The second maintains that forward-looking financial markets are pricing assets to incorporate the aging of the boomer generation. As a result, there will not be a market meltdown when the baby boomers retire. This paper bridges the gap between these opposing arguments by asking the following question: can demographic change, which is slow-moving and predictable, have a significant impact on financial markets that are rational and forward-looking? It presents a model in which rational, forward-looking agents of different ages trade in financial assets, and uses this framework to simulate a baby boom-baby bust of the kind observed in many developed countries over the post-war period. The main finding of the paper is that changes in the age distribution have significant effects on asset returns, even when investors are rational and forward-looking, and that these effects have important implications for the welfare of baby boomers and surrounding cohorts Annotation This paper explores whether changes in the age distribution have significant effects on financial markets that are rational and forward-looking. It presents an overlapping generations model in which agents make a portfolio decision over stocks and bonds when saving for retirement- Using the model to simulate a baby boom-baby bust demonstrates that returns to baby boomers will be substantially below returns to earlier generations, even when markets are rational and forward-looking. This result is important because the current debate over how to reform pay-as-you-go pension systems often takes historical returns on financial assetsand on the equity premiumas given