How Will More Retirees Affect Investment Returns?

Private savings are an increasingly important source of retirement income. How much income people get depends on their investment returns – the interest, dividends, and profits that the private savings produce. These returns could be affected by the ongoing transition to an older society with a larger share of retirees. This brief reviews studies by the Social Security Administration’s Retirement Research Consortium and others on the long-term effect of this demographic transition on investment returns, which could moderate, or exacerbate, the nation’s retirement income challenge. The discussion proceeds as follows. The first section provides an overview of the demographic transition and its potential effects on the supply and demand for savings. The second section reviews studies that try to identify relationships in the historical record between changes in the age structure of the population and investment returns. The third section reports on how retirees draw down their savings and the resulting impact on the supply of savings. The fourth section assesses attempts to project future investment returns. The final section concludes that the demographic transition will likely put some downward pressure on investment returns. While it is unclear how strong that pressure will be, the decline in returns will require workers to save more to secure a given amount of income in retirement.