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Social Security Investment in Equities

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Author Info
Peter Diamond (MIT)
John Geanakoplos () (Cowles Foundation, Yale University)

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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.

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File URL: http://cowles.econ.yale.edu/P/cd/d13a/d1314-r.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1314R.

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Length: 30 pages
Date of creation: Jul 2001
Date of revision: Aug 2002
Publication status: Published in The American Economic Review (September 2003), 93(4): 1047-1074
Handle: RePEc:cwl:cwldpp:1314r

Note: CFP 1070.
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Related research
Keywords: Social security; privatization; diversification;

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Find related papers by JEL classification:
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
    Other versions:
  2. Olivia S. Mitchell & James F. Moore, . "Retirement Wealth Accumulation and Decumulation: New Developments and Outstanding Opportunities," Pension Research Council Working Papers 97-8, Wharton School Pension Research Council, University of Pennsylvania.
    Other versions:
  3. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March. [Downloadable!]
  4. Henning Bohn, . "Risk Sharing in a Stochastic Overlapping Generations Economy," University of California at Santa Barbara, Economics Working Paper Series 3-98, Department of Economics, UC Santa Barbara. [Downloadable!]
    Other versions:
  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. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
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  7. Fischer, Stanley, 1972. "Assets, Contingent Commodities, and the Slutsky Equations," Econometrica, Econometric Society, vol. 40(2), pages 371-85, March. [Downloadable!] (restricted)
  8. 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. [Downloadable!]
  9. 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.
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Piero Gottardi & Felix Kubler, 2006. "Social Security and Risk Sharing," Working Papers 2006_38, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
    Other versions:
  2. Kent Smetters, 2005. "Social Security Privatization with Elastic Labor Supply and Second-Best Taxes," NBER Working Papers 11101, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Erik Hurst & Paul Willen, 2004. "Social Security and unsecured debt," Public Policy Discussion Paper 04-10, Federal Reserve Bank of Boston. [Downloadable!]
    Other versions:
  4. Francisco Gomes & Alexander Michaelides, 2004. "Aggregate Implications Of Defined Benefit And Defined Contribution Systems," Working Papers, Center for Retirement Research at Boston College 2003-16, Center for Retirement Research. [Downloadable!]
    Other versions:
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