Thoughts on the precipice of the next obvious economic experiment...

(Note to scholars: if this is your area, understand that I am yet a visitor here, and likely haven't met your work yet. These are then my naive thoughts ahead of digging further; if I've said the obvious or the laughingly wrong it's simply the nature of my daily reading being in my own little plot of the work. AKA forgive me my sins, as I forgive yours...)

(Note the second: I have a necessity in the daily grind for reading economics literature, but at what the pros would consider a superficial level; I need a certain level of operational and general mapping. The details are usually not part of my practice, except at the micro level. So when I say "I don't see..." I mean the blogs, the Economist, the popular level of discussion, as opposed to the discussion taking place at the journal level. In economics, however, the popular discussion level has an outsized influence, certainly compared to my daily working area.)

Coming up, we're all going to be part of an interesting experiment: a very small, easily identified perturbation at the macroeconomic level.

Here's what I mean. It is a fact of the 401K/IRA construction that, at age 70 and a bit, the IRS and tax law hold that the accounts must begin to be liquidated. Not all at once, the liquidation is scheduled over a certain timeframe, a percent here, a percent there. In my calculations, I find that the aggregate value of a 401K account can continue to grow, for perhaps 15 years or so, to say age 85 or so depending on starting assumptions, even though the account is being sold out of in IRS terms.

This simply reflects the rate schedule in current IRS guidance. The schedule is set such that the overall disruption is mild. At first, the effect is simply to slow the rate of growth, beginning at age 70.5 and going forward to about age 85, and then finally turning over and becoming a net sell-off of the whole 401K account for the years after.

You might get a slightly different result, it depends in detail on how an account is structured, bonds versus stocks versus cash, etc. So please don't take this as a hard result, merely one possible result among an ensemble.

Ok, so what? Every year, some population hits 70.5 and has to sell off their accounts.

Well, the Boomers born in 1950 hit 70.5 next year. Further, the Boomers used the 401K structure more than the age groups before them, relatively. They represent a slightly outsized net population increase in the overall retirement account balance.

So, when the 1950 cohort hit the 70.5 line:

1. One would expect a net, small, broad-based (across stock, bond, cash, etc markets generally) move toward sell across markets, compared to current. Something like, instead of the S&P 500 growing at 10 percent per annum, growing at 9.5 percent, or similar.

2. One would expect a net, small, broad-based increase in tax receipts at the federal level, compared to baseline. Perhaps half a percent or so?

(1) is simply that, in aggregate, there will be more sellers than there otherwise would have been. Taken in aggregate, this should be a very small (hence, perturbation) change, noticeable only in aggregate, measurable only by careful work.

(2) I get to in the following way: a retiree's income drops, currently on age 65 or so, to a first approximation by about half. Social security and so on. And then, at age 70.5, said retiree has to increase their total income by selling off a percentage of their 401K. On net, the effect expected would then be an increase of tax receipts by a percentage of the difference between the Boomers and their immediate predecessors, net of market movements, etc.

3. The boomer bulge is approximately 15 years in timeframe past 2020; the effect will be, in fiscal terms, short-lived.

4. The effect will likely be small enough so that Brad Delong, Paul Krugman, Tyler Cowen, Scott Sumner, and their colleagues will have years, nay decades of fun arguing over "Who did what to Whom?"

5. We haven't seen the end of the data-driven macroeconomist (i.e. Emi Nakamura) winning the major awards, relative to the model-driven macroeconomist. In fact, we're just beginning...