private DB plan perform poorly, shareholders in the sponsoring firm earn lower returns because the firm must make compensatory contributions to fund the plan. Taxpayers play the role of shareholders in public sector DB plans. Past and projected rates of return are likely to affect the willingness of firms and government to continue DB plans, or at least continue them at the same level.

Private wealth accumulation supports a substantial share of retirement spending for some older households in the United States. For those households with substantial wealth, the rate of return can be an important determinant of retirement income. However, not all households have much exposure to financial markets, and many retirees have low levels of both financial and physical assets. For these households, rates of return are likely to be relatively unimportant influences on their financial circumstances.

Poterba, Venti, and Wise (2011) report that in 2008, the median holding of all financial assets, including those in individual retirement accounts and other similar vehicles, among households headed by someone aged 65–69 was $52,000. The analogous statistic was $112,000 for married couples. Because the ownership of assets is concentrated, average assets per capita are substantially greater than the assets of the median household. For households near the median as well as for those with fewer financial assets, their financial asset holdings are smaller than the value of prospective Social Security benefits. Financial assets are also smaller than accumulated home equity for those who own a home and smaller than DB pensions for those who are eligible for such benefits. Because the wealth distribution is highly skewed, however, there are also many households with substantial asset holdings for whom changes in rates of return are consequential.

Many factors affect capital market returns, including global demographic trends, long-run trajectories of productivity growth, investors’ attitudes toward risk, and government tax and spending policies. Some analysts have suggested that population aging during the next few decades will drive down the general level of investment returns (Arnott and Chaves, 2011; Liu and Spiegel, 2011). They reason that as baby boomers approach the traditional age at which asset holdings peak, assets will be in plentiful supply and the equilibrium return on assets will decline. As The Economist reported (2006), some have even suggested that when baby boomers draw down their financial assets to pay for their retirement consumption, selling pressure may generate an asset market meltdown, a sharp decline in asset values. However, that scenario seems unlikely because it is inconsistent with forward-looking behavior on the part of financial market participants; it would require a sharp fall in asset prices in response to a predictable demographic event.

This chapter examines the ways in which prospective changes in the age structure of both the United States and the global population may af-



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