Over at the Bank for International Settlements, Elod Takats has a new working paper that examines how demographics may affect asset prices (ht Torsten Slok). As he notes, standard economic theories suggest that aging will lead to lower asset prices. In an overlapping generations model, for example:
[T]he young save for old age by buying assets, while the old sell assets to finance retirement. This asset transfer can happen directly or through institutions such as pension funds. In this setting, the changes in the relative size of asset buyers (the young) and sellers (the old) have consequences for asset prices. In particular, the asset purchases of a large working age generation, such as the baby boomers in the United States, drives asset prices up. Conversely, if the economy is ageing, ie the subsequent young generation is relatively smaller, then asset prices decline.
Takats tests this theory on international data on house prices and finds a significant link with population age. He uses that relationship to estimate how much demographics affected house prices in recent decades and to project, based on demographic estimates from the UN, how population aging will affect house prices in the future:
He concludes that demographic trends boosted U.S. house prices by almost 40% over the past four decades. Given current population trends, however, his model predicts that aging will trim about 30% off of house prices over the next forty years.
I should emphasize that this does not mean that house prices will actually fall over that period. Other factors, e.g., growing incomes, should continue to boost prices. But house prices will now face a demographic headwind–blowing at about 80 basis points per year–rather than a demographic tailwind.
These headwinds will be even stronger in Europe:
Public pensions funds are the key budget challenge facing many state and local governments. Why? Because it’s been easy for officials to promise future pension benefits without setting aside enough money to pay for them (the same problem afflicts corporate pension plans and Social Security).
The New York Times has a front-page story describing New York’s latest plan to put off pension funding:
Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.
And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.
Perhaps not surprisingly, some leaders are hesitant to refer to this as borrowing:
Those pushing the plan are taking pains to avoid describing it as “borrowing,” saying they are seeking to amortize or “smooth” pension contributions. That is in part because they have distanced themselves from a plan proposed by Lt. Gov. Richard Ravitch that would have the state borrow as much as $6 billion for general operating expenses over the next three years in exchange for budget reforms.
“We’re not borrowing,” said Robert Megna, the state budget director and one of the governor’s top advisers.
Mr. DiNapoli, the comptroller, said: “We would view it more as an extended-payment plan.”
Asked about the pension plan, Mr. Ravitch said, “Call it what you will, it’s taking money from future budgets to help solve this year’s budget.”
Mr. Megna, when reminded that the plan envisioned delaying an obligation today and eventually paying it back with interest, softened his view in the process of a lengthy interview.
“I’m not going to sit here and characterize it as not a borrowing,” he said. “But it is an annual, relatively small borrowing we’re doing this year that were doing to get a modest savings.”
Of course, those “savings” are only of the temporary, political variety. The plan does nothing to add actual savings to New York’s underfunded pension plan.