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Introduction
Baby boomers - those who were born between 1942 and 1962 - have had, and will continue to have, an important effect on the Australian economy. The oldest baby boomers turned 60 in 2002. Most of them will retire in the next 20 years. During 1949-1959 the average population growth rate in Australia was at its highest, at 2.47%, compared with 1.18% during 1990-2000. Similar results are found in most developed countries in the world. In the early 1990s these baby boomers saved a significant component for retirement. They have also invested in stocks and housing. It is the general perception that, after their retirement, they will have to liquidate their assets in order to finance themselves. Important questions often raised include: What will happen to the economy when the baby boomers start to retire? How will they affect the stock market after retirement? Do they have sufficient savings for retirement? If not, will they need to liquidate their assets? To whom they will sell the assets? Economies with a stable population growth and age distribution should not have an effect on capital markets. So what happens when the old-age dependency ratio1 rises, and will there be fewer young savers to buy the assets sold by the baby boomers? The lifecycle hypothesis, which was produced by Franco Modigliani, Richard Brumberg and Albert Ando in a series of articles in the 1950s and 1960s (e.g., Ando and Modigliani, 1963), states that people's consumption and investment patterns differ at the various stages of their life. Younger people invest heavily in housing and other financial assets. Mankiw and Weil (1989) and Bakshi and Chen (1994) studied this phenomenon for the USA and found that housing prices during 1970-1980 increased during the baby boomers born during the 1920s and 1930s.
With most baby boomers due to retire in about a decade from now, this research provides essential, timely information for investors and policymakers. The answer to the question of how the baby boomers and their mandatory savings will affect asset markets is an important factor in assessing whether they have saved enough for retirement, and hence the implications for government programmes such as social security and medicare. A natural corollary to attributing the equity boom to the...