PensionReforms' summary and comments

The report (for a G-20 workshop hosted by the Reserve Bank of Australia and the Australian Treasury)  redresses an apparent imbalance in research on the possible effects of ageing populations on financial markets.

"Whereas there is extensive research on macroeconomic effects and on financial asset prices, there has been more limited systematic research into the impact of demographic changes on financial asset volumes and financial market structure more generally, as driven by age-related household saving and asset allocation decisions. Our empirical work .. suggests that demographic changes have had a detectable impact on financial structure. Ageing tends to benefit bond markets relative to equity markets, while depressing private saving and external balances, albeit not sharply reducing the overall size of the financial sector. Continuation of such patterns during the coming period of ageing have wide-ranging implications for policy-makers and market participants."

The test is whether markets reflect the traditional life cycle hypothesis - as populations age, do the overall structures of financial markets move through the cycle?  After reviewing the literature and looking at key indicators of the maturity of two main types of country (emerging market economies - EMEs - and advanced economies), 72 countries in all are then examined - the relative size of the financial sector (other than bond markets) is related to the level of economic development; the size of the population over age 65 to the size of financial markets and also bond markets in particular whereas the size of share markets relates more closely to the size of the age 40-64 age cohorts.

Financial saving should be less important for younger ages and so the paper notes that the size of financial markets is not affected by the relative sizes of the age 20-39 age cohorts whereas the demand for bank loans is related.

 The paper notes some differences between EMEs and others but patterns are broadly similar.  However, GDP per capita tends to be associated positively with more developed financial markets but not for bonds.  As between EMEs and advanced countries, the report suggests that ageing populations in the latter will shift the ownership of financial claims towards EMEs but not irrevocably.

 The report suggests (pp289-90) a range of further needed work including quantity effects of ageing on pricing of financial markets; whether governments should issue 'longevity bonds'; the impact of ageing on corporate financing; the interaction of house prices and borrowing rates; the impact of ageing on the banking sectors and the impact of a trend away from PAYG state pensions to pre-funding.

PensionReforms thinks that all this looks much as might have been expected but it's nice to know.  Countries' financial markets, like individuals, seem to react to the changing shape of populations that will make seemingly predictable demands on services and economic claims as they age.   62