Why So Many Americans Die Poor, and Other Big Retirement Questions: MIT’s Poterba

While many a retirement researcher has struggled with the so-called annuity puzzle—the question as to why more people for whom annuities would seem to be sensible investments don't purchase them—Poterba, who has conducted voluminous research on the topic over several decades, is notably unpuzzled.

"There are two elements to an annuity decision," he said. "One is asking what it would cost to purchase an annuity. The other is thinking about the benefit calculations associated with annuities."

Poterba says many households simply lack the financial wherewithal to purchase annuities; their financial assets may not be sufficient to meet minimum purchase requirements, for example. At the other end of the spectrum, he says, there are households with asset levels where they are not likely to draw down assets in their lifetimes.

"There's a middle group where Social Security won't protect all their living standard going forward, and they may have sufficient financial assets to make the cost-benefit analysis," Poterba continues. But for this middle group, whether to purchase the annuity depends on that cost-benefit analysis of "household specific circumstances" and the market price of annuities. "There is a large degree of heterogeneity" among middle-market households, he says.

One more of the innumerable key issues upon which Poterba's research has cast light is the feared "asset market meltdown" about which some demographic analyses have warned. In an important paper published in 2001, Poterba—prompted by widespread fears at the time that the aging of the baby boomers was a demographic time bomb for stocks—investigated the relationship between the age structure of the population and stock market returns.

Poterba projected that demand for equities in the years 2020 to 2050 would not decline sharply, arguing that age-wealth profiles would decelerate only gradually—in contrast to the robust surge in asset values on the way up, as the age and wealth of the baby boomers swelled in the 1980s and '90s.

Market developments since the publication of his research has not altered in any way Poterba's conclusions.

"I think it is very important not to take a narrow national perspective on this. We live in a global capital market. If there's an aging population in Japan, they may be able to invest in assets supplied in other countries," Poterba says.

He adds that income growth in places like China, India and Brazil will supply the buyers for assets of aging populations in the U.S. "As their populations grow, their demand for U.S. financial assets will presumably rise," he says.

While this is true for assets like stocks that can be easily traded across borders, Poterba warns the case may be different for "fixed assets that are difficult to trade to foreign investors—owner-occupied housing, for example."

On balance, Poterba expects only "relatively modest" headwinds facing stock markets in the developed world as a result of demographic shifts.