Most developed countries will be going through a strong demographic transition over the coming decades. The large Baby Boomer cohort is approaching retirement and whereas it is often believed that they brought an economic dividend when they were working, it is assumed they will prove to be a drain on economic growth as they retire. Equally, financial markets are worried that the Baby Boomers will put the financial assets they accumulated over their life-cycle simultaneously on the market, thereby causing asset prices to tumble.
However, looking at data about the life-cycle saving behaviour of households casts doubts that there is strong asset deccumulation even in the very old age. This work contributes on this issue by providing empirical evidence on individual stock market participation over the life-cycle in Germany between 2000 and 2011. The results give only weak support for strong asset deccumulation during retirement. In combination with the institutional design of the German pension system and other findings, demographic ageing is unlikely to lead to an asset price meltdown.
Table of Contents
1 Introduction
2 Demographic Transition in Germany and other Nations
3 The Life-Cycle Saving Model
4 Demography and Asset Prices
5 Empirical Analysis
5.1 Model Variables and Expectations
5.2 Probit Estimation for 2004
5.3 Probit Results over Time
6 Discussion
6.1 Discussion of the Empirical Results
6.2 Implications of the Empirical Results for Asset Prices
7 Conclusion
Research Objectives and Themes
The primary objective of this work is to empirically investigate the life-cycle saving hypothesis within the context of Germany's demographic transition and to assess whether this transition threatens to trigger an "asset price meltdown." By utilizing panel data from the German Socio-Economic Panel (SOEP), the study evaluates individual stock-ownership patterns over time to determine if a significant asset deccumulation occurs during retirement.
- Demographic transition and its projected impact on financial markets.
- Evaluation of the life-cycle saving model and the asset price meltdown hypothesis.
- Empirical analysis of individual stock market participation in Germany (2000–2011).
- Influence of socio-economic factors such as risk tolerance, education, and employment status on investment behavior.
- Long-term implications of demographic ageing for international capital markets and asset price stability.
Excerpt from the Book
1 Introduction
Between 2015 and 2050 the share of the elderly in relation to the working age population is projected to almost double in Germany. As the Baby Boomers retire and exit the labour market, a shrinking labour force will likely depress economic growth and the German Government will struggle to keep its budget balanced (European Commission 2015). Regarding the latter, there was – and still is – great concern that the German pension system is not sustainable, so that future social security contributions will not be enough to provide promised public pensions (Raffelhüschen 2002). For this reason, Germany introduced the so-called Riester-Rente in 2002, which promotes private retirement provision plans and is likely to increase the amount of privately held financial assets.
But the value of these assets may decrease as demographic ageing is likely to affect financial markets, ultimately leading to tumbling asset prices referred to as the asset price meltdown hypothesis. The hypothesis is derived from the life-cycle saving model (Modigliani and Brumberg 1954), which suggests that people accumulate assets during their working age, which they sell to finance consumption during retirement. Thus, if the Baby Boomers put their assets simultaneously on the market when retiring, it could trigger a price drop and result in a great loss of the cohort’s retirement provisions. However, in contrast to most theoretical models, empirical evidence for the asset price meltdown hypothesis is mixed. For example, findings seem to be affected by the empirical specification or vary across countries (Brooks 2006), whereby most research focuses on the US. More importantly though, household survey data for the US seems to partly reject the life-cycle hypothesis (Poterba 2001). Consequently, if there is no asset deccumulation when retiring, demographic ageing could hardly affect asset prices from a supply and demand perspective.
Summary of Chapters
1 Introduction: This chapter introduces the demographic challenges facing Germany and presents the core research question regarding the potential for an asset price meltdown.
2 Demographic Transition in Germany and other Nations: This section provides an overview of global demographic shifts, specifically highlighting the projected rise in the elderly dependency ratio for Germany.
3 The Life-Cycle Saving Model: This chapter explains the theoretical foundation of the study, describing how the model predicts asset accumulation and deccumulation over an individual's lifetime.
4 Demography and Asset Prices: This section reviews existing empirical literature regarding the link between demographic changes and their impact on equity and bond market returns.
5 Empirical Analysis: This chapter details the methodology, variables, and the Probit regression results used to analyze stock-ownership patterns among the German population.
6 Discussion: This section interprets the empirical findings and discusses their implications for the future of asset prices and capital market stability.
7 Conclusion: The final chapter summarizes the study's findings and suggests that an asset price meltdown in Germany is unlikely.
Keywords
Demographic transition, Life-cycle saving model, Asset price meltdown, Stock-ownership, Germany, SOEP, Probit model, Retirement provision, Asset deccumulation, Financial markets, Demographic ageing, Socio-economic factors, Risk tolerance, Capital markets, Riester-Rente.
Frequently Asked Questions
What is the core subject of this research paper?
The paper examines the empirical validity of the life-cycle saving hypothesis in Germany, specifically investigating whether the ageing population will lead to mass asset selling that could cause an "asset price meltdown."
What are the primary thematic fields covered?
The core themes include demographic ageing, household financial saving behavior, stock market participation, the sustainability of pension systems, and the long-term impact of these factors on financial market stability.
What is the primary research question?
The primary research question is whether individual stock-ownership patterns in Germany exhibit the hump-shaped behavior predicted by the life-cycle model, and consequently, whether demographic ageing poses a genuine threat to asset price stability.
Which scientific methods are employed?
The author uses a quantitative approach, specifically employing a Probit model to analyze longitudinal data from the German Socio-Economic Panel (SOEP) between 2000 and 2011 to identify patterns in individual stock-ownership.
What topics are discussed in the main body of the work?
The main body covers the theoretical background of the life-cycle saving model, a review of existing literature, an empirical analysis of German household data using Probit regressions, and an extensive discussion on the implications for capital markets and pension policy.
Which key terms characterize this study?
Key terms include demographic transition, life-cycle saving, asset price meltdown, stock-ownership, empirical evidence, and pension policy reform.
How do the findings regarding the German Saving Puzzle affect the research?
The study notes that German households do not typically show the predicted asset deccumulation in old age, which suggests that the classic life-cycle hypothesis may not fully apply to the German context due to generous pension systems and other saving motives.
What role do international capital markets play in the author’s conclusion?
The author suggests that international capital flows, where savings from ageing economies are invested in capital-hungry, younger economies, serve as a buffer that can moderate potential price pressures.
Why is the "peak age" of stock-ownership significant?
The peak age marks the point at which the probability of owning stocks begins to decline; the author finds that this peak age has increased over time, potentially due to rising life expectancy and changing retirement patterns.
- Arbeit zitieren
- Nicolas Banholzer (Autor:in), 2012, The Consequences of Demographic Ageing on Financial Markets, München, GRIN Verlag, https://www.grin.com/document/372039
