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Ageing and Financial Markets - A Literature Survey
There are widespread effects of ageing affecting financial markets, that can be expected to intensify as ageing progresses. These include effects on household saving and wealth, pension provision, the demand for individual financial assets, consequent effects on financial structure, effects on asset prices and interest rates, consequences for housing, effects on banking and financial stability, and international capital flows.
Advanced countries like the UK, in common with the rest of the world, are undergoing a demographic transition due to declining fertility and rising longevity. While most of the literature is US or cross-country based, we consider its applicability to the UK and other advanced countries to be reasonably direct.
Saving follows a life-cycle pattern of being low or negative (involving borrowing) in young adulthood, followed by high saving up to retirement and negative saving thereafter. Ageing will increase the weight of the elderly, suggesting a decline in saving.
While total wealth follows a similar pattern to saving up to retirement, the elderly do not on average appear to decumulate financial assets in the way the life-cycle pattern would suggest. This may be due to planned or unanticipated bequests and from precautionary motives.
Pension systems will affect financial systems whether they are pay-as-you-go or funded. Pay-as-you-go will tend to reduce public sector saving, with potential risks to fiscal sustainability, while funded pensions may raise household saving and may lead to greater investment in risky assets.
Individuals tend to switch from higher-risk to lower-risk assets at the time of retirement. As the elderly cohort grows, this may have an impact on financial asset volumes and financial market structure.
Equity and bond prices can be influenced by demographic patterns as well as volumes. While there is widespread evidence that a boost to prices can arise from a large middle-aged cohort, the evidence of negative effects on asset prices from an increase in the size of the elderly cohort is much less clear.
There is considerable evidence that ageing tends to put downward pressure on short term interest rates. However, the effect is long-term and may not have been a prime cause of low rates in the 2010s. One question is whether the low interest and inflation rates are due to ongoing shifts in local and global demographics or specific aspects of the one-off expansion of the labour force in China.
Demographic effects are detectable for housing as well as financial assets, with the working population tending to drive prices up while retired groups restrain it.
The ageing of the population, driven by declining fertility and rising longevity, is an ineluctable process with major economic and financial implications. This literature survey seeks to provide an overview of effects of ageing on financial markets, focusing inter alia on effects on household saving and wealth, pension provision, the demand for individual financial assets, consequent effects on financial structure, effects on asset prices and interest rates, consequences for housing, effects on banking and financial stability, and international capital flows. The survey covers both the theoretical and empirical literature. Important underlying aspects are the life-cycle pattern of consumption and saving, and the pattern of risk preferences for older people, which may impact on all these areas. There are important policy implications, and further empirical work is warranted.
Advanced countries like the UK, in common with the rest of the world, are undergoing a demographic transition due to declining fertility and rising longevity. While most of the literature is US or cross-country based, we consider its applicability to the UK and other advanced countries to be reasonably direct.
Saving follows a life-cycle pattern of being low or negative (involving borrowing) in young adulthood, followed by high saving up to retirement and negative saving thereafter. Ageing will increase the weight of the elderly, suggesting a decline in saving.
While total wealth follows a similar pattern to saving up to retirement, the elderly do not on average appear to decumulate financial assets in the way the life-cycle pattern would suggest. This may be due to planned or unanticipated bequests and from precautionary motives.
Pension systems will affect financial systems whether they are pay-as-you-go or funded. Pay-as-you-go will tend to reduce public sector saving, with potential risks to fiscal sustainability, while funded pensions may raise household saving and may lead to greater investment in risky assets.
Individuals tend to switch from higher-risk to lower-risk assets at the time of retirement. As the elderly cohort grows, this may have an impact on financial asset volumes and financial market structure.
Equity and bond prices can be influenced by demographic patterns as well as volumes. While there is widespread evidence that a boost to prices can arise from a large middle-aged cohort, the evidence of negative effects on asset prices from an increase in the size of the elderly cohort is much less clear.
There is considerable evidence that ageing tends to put downward pressure on short term interest rates. However, the effect is long-term and may not have been a prime cause of low rates in the 2010s. One question is whether the low interest and inflation rates are due to ongoing shifts in local and global demographics or specific aspects of the one-off expansion of the labour force in China.
Demographic effects are detectable for housing as well as financial assets, with the working population tending to drive prices up while retired groups restrain it.
The ageing of the population, driven by declining fertility and rising longevity, is an ineluctable process with major economic and financial implications. This literature survey seeks to provide an overview of effects of ageing on financial markets, focusing inter alia on effects on household saving and wealth, pension provision, the demand for individual financial assets, consequent effects on financial structure, effects on asset prices and interest rates, consequences for housing, effects on banking and financial stability, and international capital flows. The survey covers both the theoretical and empirical literature. Important underlying aspects are the life-cycle pattern of consumption and saving, and the pattern of risk preferences for older people, which may impact on all these areas. There are important policy implications, and further empirical work is warranted.
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