BABY-BOOMER BUST\Experts looking at long term see bleak stock market when tomorrow's\retirees cash in.

Byline: Peter Passell The New York Times

Is the high-flying stock market, buoyed by a seemingly limitless tide of pension money, heading for a fall? No, not on the order of last Friday's 171-point drop, but something potentially far more disturbing two or three decades down the road - when the baby boomers retire and begin to trade in their securities for Winnebagos, visits to the periodontist and trips to Disney World with the grandchildren?

"Don't bother me with this one - too much can happen between now and then," responded Bruce Steinberg of Merrill Lynch, reflecting the understandable impatience of Wall Streeters preoccupied with the more immediate questions of where inflation, GDP and Alan Greenspan are heading.

But the issue, being raised quietly by the handful of specialists who study the links between demography and economics, is not the blue sky it might seem. With the population aging and Social Security drifting toward the political equivalent of Chapter 11, financial gurus are begging, pleading, cajoling Americans to save more for their own retirement.

And the numbers suggest that the message has gotten through: investors have poured nearly half a trillion dollars into stock mutual funds over the last four years - $50 billion in the first two months of this year alone.

Leaving aside Friday's 3 percent plunge, many of these new investors have known the market only to rise, and expect that to be the case right through their golden years.

But economists taking the long view worry that the very process of cashing in the boomers' vast holdings of mutual funds could transform the most energetic of bulls into a sluggish beast.

"The difference between 7 percent and 3 percent real annual return is night and day," said James Poterba, an economist at the Massachusetts Institute of Technology.

Nobody is suggesting that Rip Van Investor is going to wake up one day to discover that no one wants to buy his shares of Netscape Communications.

But John Shoven, an economist at Stanford, does imagine "1970s-like stagnation in stock prices," which would extinguish many a dream of Mediterranean cruises and lazy mornings on the golf course. To protect that dream, Rip may have to save a lot more than he expected.

Start with some basics. Most personal wealth other than housing is accumulated through employer-based pensions. Shoven and Sylvester Schieber, an economist with Watson Wyatt Worldwide pension consultants, have projected future savings in both "defined benefit" pension plans, which promise a specific monthly pension, and "defined contribution" plans, which simply serve as tax-sheltered savings vehicles.

Based on plausible assumptions about the numbers of covered workers, their wages and their life expectancy as retirees, they expect real net inflows into pension plans - contributions and investment earnings, less benefits paid - to rise gradually from $102 billion in 1995 to $149 billion in 2010. That is the year before baby boomers start to turn 65.

By the second decade of the 21st century, though, increases in pension assets tail off - and may decline even sooner if the continuing downsizing of the corporate work force pushes more Americans into premature retirement. Adjusted for inflation, the value of the national nest egg actually begins to fall in 2025.

Shoven and Schieber estimate that real pension savings will slip from about 3.6 percent of total wages today to zero in 2024 and to a negative 3.5 percent in 2040. With the flood of baby boom pensioners cashing in, total pension assets are expected to fall to $15 trillion in 2065 from $28 trillion in 2040. The total capitalization of listed domestic stocks today, by the way, is about $6 trillion.

The magnitude of this projected drop in the middle of the next century has led Schieber to refer jocularly to the research as the "market meltdown paper." This joke cuts uncomfortably close to the bone.

There has long been evidence that the age profile of the population helps to determine the way people hold their savings. In a 1973 study, John Bossons of the National Bureau of Economic Research found that half the wealth owned by Americans between 25 and 44 was in housing. This percentage fell with age, reaching 36 percent for those 55 to 64 and just 31 percent for people over 65.

It should not be surprising, then, that in 1989 Greg Mankiw of Harvard and David Weil of Brown found a strong statistical relationship between housing prices and the numbers of house-needy new families over very long periods.

When the adult population is growing rapidly, housing prices follow. And what worked going up in the 1970s, when the oldest boomers were hitting their mid-20s, has worked on the way down since the late '80s, when those people hit their 40s.

Prices have stagnated in recent years, trailing the rise in the cost of living. And in the housing markets that were hottest in the previous decade - Boston, Southern California, metropolitan New York - they have actually fallen.

Gurdip Bakshi of the University of New Orleans and Zhiwu Chen at the Ohio State College of Business refined the analysis. They predicted that the baby boomers - the roughly 80 million people born from 1946 through 1964 - would drive the relative demand for housing and stocks as this population bulge moved through the demographic "snake."

Stocks did rise and housing prices were stable in the first two decades after World War II; the boomers' young parents, it seems, were saving for their children's education. But when those children came of age, the cost of a college education rose as demand for it rose, and priorities shifted, as a large swath of the population began favoring real estate over financial assets. By virtue of their numbers, that set off a housing boom and a stock market bust. Now, with the boomers graying, the stock market is pulling in most of their savings.

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Chart When the Boomers Cash Out Estimated net flow of assets into or out of pension and retirement savings, based on assumptions about future working populations, inflation and rates of return similar to those the Social Security Administration uses. Figures are adjusted for inflation. The New York Times