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The Effects of Investing Social Security Funds in the Stock Market When Fixed Costs Prevent Some Households from Holding Stocks

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  • Andrew B. Abel

Abstract

With fixed costs of participating in the stock market, consumers with high income will participate in the stock market, but consumers with lower income will not participate. If a fully-funded defined-contribution social security system tries to exploit the equity premium by selling a dollar of bonds per capita and buying a dollar of equity per capita, consumers who save but do not participate in the stock market will increase their consumption, thereby reducing saving and capital accumulation. Calibration of a general equilibrium model indicates that this policy could reduce the aggregate capital stock substantially, by about 50 cents per capita.

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  • 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.
    • Handle: RePEc:nbr:nberwo:7739
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    References listed on IDEAS

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    5. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    6. Robert J. Barro & Paul Romer, 1993. "Economic Growth (1992)," NBER Books, National Bureau of Economic Research, Inc, number barr93-1, July.
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    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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