Will Boomers Cause a Stock Market Crash?

Thornton Parker

href="http://www.bkconnection.com/authorbiobooks.asp?Type=AUTH&SEL=THORNTONPARKER">Thornton Parker has
one more reason to hate the baby boomers. A former systems analyst and
strategic planner with a quarter-century of experience in government, Parker
believes stock prices are doomed to fall as baby boomers cash out of their
401(k)s and IRAs. (The oldest boomers turn 64 this year; the youngest hit 46.)
With much smaller generations following the largest demographic bulge in U.S.
history, Parker reasons, boomers will flood the market as they sell their stock
holdings, depressing prices and possibly causing a market crash.

Parker first explored this concern 10 years ago in his book What
If Boomers Can’t Retire? His latest research only reinforces his
worries. Semi-retired in Harrisonburg, Va., Parker spoke with MoneyWatch,
refuting a recent href="http://www.cbo.gov/ftpdocs/105xx/doc10526/09-08_Baby-Boomers.pdf">Congressional Budget Office report (CBO) saying asset prices are unlikely to decline when boomers retire. The CBO
study, he says, is “a pretty poor piece of work.”

Why do you call stock-based retirement plans a ‘national Ponzi
scheme’?

It is a Ponzi scheme in that early returns to early
investors — the boomers — must come from money paid in by
later investors, the younger workers. The boomers will need to sell to realize
any gains. That puts the plans in the same category as Bernie Madoff’s
operation. There will be too few buyers with adequate purchasing power and the
will to pay adequate prices for the boomers’ stocks.

Won’t boomers stretch their 401(k) stock sales over many years?

If there’s
a serious bear market, boomers may decide to get out quickly. My guess is that there is a
least a 99 percent chance that boomers will encounter problems trying to sell
shares at reasonable prices. That isalready happening. At the retirement
community where I live, there are empty cottages people signed up for but could
not afford to move into because they couldn’t get enough for their
houses and stocks.

The Congressional Budget Office’s report concluded we wouldn’t
see a decline in asset prices, mainly because it hasn’t happened
historically when people retire. Plus, foreigners could make up the difference.
What’s wrong with that thinking?

History is not a good guide to unprecedented events, and
that’s what we’re looking at now, from a magnitude
standpoint.

Did the CBO look at the same data you did, and come to a different
conclusion?

No. The CBO made national projections using the Survey of
Consumer Finances, a triennial survey of about 3,000 households done by the
Federal Reserve Board. I use the Fed’s Flow of Funds Accounts, which
is updated every quarter and includes the total of all U.S. stocks outstanding,
to estimate what I call the “retirement stock inventory” —
the total quantity of stocks held in retirement plans, that will probably have
to be sold. The inventory includes stocks and stock mutual funds which are held
by IRAs and annuities along with state, local government, and company pension
plans, most of which were bought to be sold to pay retirement incomes.

At the end of 2008, these retirement portfolios held about
$6 trillion worth, or more than 60 percent of the stocks available to them —
far more than the CBO considered.

What about the argument that foreign buyers will take up the slack?

It’s entirely possible that stocks will be able to
be sold overseas. But at what prices? And how does buying control of U.S.
companies by foreign competitors square with public policy, national security,
and corporate management questions?

Can investors dodge this problem somewhat by owning foreign stocks?

It’s possible. You’d need to the same
kind of analysis for other countries that I’ve done here.

You’ve said people need to find investments like solid dividend
stocks and municipal bonds for retirement. Will the income from those
investments act as a buffer if market values fall when you need to cash in?

Partly that, yes. But more important, retirees need income
streams that will continue for as long as they live. It is absurd to expect
people to use some formula to time the sales of their stocks based on their
life expectancies.

What reaction did you get to the book 10 years ago, and what’s
the reaction today?

When I gave a talk to actuaries before the market broke in
2000, there was disbelief and outright hostility. At a presentation about a
year ago to government pension plan trustees and managers, I got a strong sense
of fear.

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