Thursday, October 09, 2008

Retirees feel pressure to dump stocks immediately, given fiscal crisis

One of the most disturbing aspects of the financial crisis is indeed that senior citizens, as a class of people, may feel pressured to pull all of their money out of stocks into cash-like, insured instruments. If all seniors did this at once, the pressure on the equity markets would be enormous, perhaps pressing it down another 15%, the Dow to below 8000.

Young and middle aged people, everyone says, have the luxury of dollar-cost averaging. They can simply buy more shares while equity markets are down and take advantage of the rebound in some number of years. The one hooker is that unemployed people (or those on low-wage jobs, the “Nickel and Dimed” class that Barbara Ehrenreich talks about) can’t very easily, and young adults with huge college loan debts also feel similar pressure.

There is, in the way equity markets behave, an unavoidable aspect of financial Darwinism. That is to say, people go through life cycles, just like in biology class. When people reach a certain age, they no longer have the same opportunities, just because of mathematical demographics. The opportunities reside in younger generations. It’s supposed to be their turn. But this essentially mathematical fact can put even more pressure on the markets.

And then, if you will, think about the demographics of longer life span. We are creating a new class of dependents, the long-lived elderly, who in many cases may no longer have the capability of returning to work and expanding their own time horizons for investment strategy. At the same time, their adult children, some of whom are childless, are finding that they will have dependents in circumstances that go beyond the scope of their own “choices.” States with filial responsibility laws could (ironically and unintentionally) suddenly exacerbate the fiscal crisis if they start enforcing them at once! A critical economic issue is keeping seniors able to work, and keeping employers interested in employing them longer. That doesn’t sound easy given the distractions of the current crisis.

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