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Social Security Investment in Equities

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Author Info

  • Peter Diamond
  • John Geanakoplos

Abstract

This paper explores the general-equilibrium impact of social security portfolio diversification into private securities, either through the trust fund or private accounts. The analysis depends critically on heterogeneities in saving, production, assets, and taxes. Limited diversification weakly increases interest rates, reduces the expected return on short-term investment (and the equity premium), decreases safe investment, increases risky investment, and increases a suitably weighted social welfare function. However, the effects on aggregate investment, long-term capital values, and the utility of young savers hinges on assumptions about technology. Aggregate investment and long-term asset values can move in opposite directions. (JEL H55)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282803769206197
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 93 (2003)
Issue (Month): 4 (September)
Pages: 1047-1074

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Handle: RePEc:aea:aecrev:v:93:y:2003:i:4:p:1047-1074

Note: DOI: 10.1257/000282803769206197
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References

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  1. John Geanakoplos & Olivia S. Mitchell & Stephen P. Zeldes, . "Social Security Money's Worth," Pension Research Council Working Papers 97-20, Wharton School Pension Research Council, University of Pennsylvania.
  2. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
  3. Arthur B. Kennickell & Martha Starr-McCluer & Annika E. Sunden, 1997. "Family finances in the U.S.: recent evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-24.
  4. Andrew B. Abel, 2000. "The Effects of Investing Social Security Funds in the Stock Market When Fixed Costs Prevent Some Households from Holding Stocks," NBER Working Papers 7739, National Bureau of Economic Research, Inc.
  5. Diamond, Peter A & Yaari, Menahem, 1972. "Implications of the Theory of Rationing for Consumer Choice Under Uncertainty," American Economic Review, American Economic Association, vol. 62(3), pages 333-43, June.
  6. Fischer, Stanley, 1972. "Assets, Contingent Commodities, and the Slutsky Equations," Econometrica, Econometric Society, vol. 40(2), pages 371-85, March.
  7. Feldstein, Martin S, 1985. "The Optimal Level of Social Security Benefits," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 303-20, May.
  8. Olivia S. Mitchell & James F. Moore, 1997. "Retirement Wealth Accumulation and Decumulation: New Developments and Outstanding Opportunities," NBER Working Papers 6178, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Piero Gottardi & Felix Kubler, 2006. "Social Security and Risk Sharing," Working Papers 2006_38, Department of Economics, University of Venice "Ca' Foscari".
  2. Erik Hurst & Paul Willen, 2004. "Social Security and unsecured debt," Public Policy Discussion Paper 04-10, Federal Reserve Bank of Boston.
  3. Smetters, Kent, 2006. "Risk sharing across generations without publicly owned equities," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1493-1508, October.
  4. Kent Smetters, 2005. "Social Security Privatization with Elastic Labor Supply and Second-Best Taxes," Working Papers wp092, University of Michigan, Michigan Retirement Research Center.
  5. Attanasio, Orazio & Kitao, Sagiri & Violante, Giovanni L., 2007. "Global demographic trends and social security reform," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 144-198, January.
  6. Robert Novy-Marx & Joshua D. Rauh, 2009. "The Liabilities and Risks of State-Sponsored Pension Plans," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 191-210, Fall.
  7. Bossi, Luca, 2008. "Intergenerational risk shifting through social security and bailout politics," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2240-2268, July.

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