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Social Security Investment in Equities

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  • 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)

Suggested Citation

  • Peter Diamond & John Geanakoplos, 2003. "Social Security Investment in Equities," American Economic Review, American Economic Association, vol. 93(4), pages 1047-1074, September.
    • Handle: RePEc:aea:aecrev:v:93:y:2003:i:4:p:1047-1074
    Note: DOI: 10.1257/000282803769206197
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    References listed on IDEAS

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    1. Andrew B. Abel, 2001. "The Effects of Investing Social Security Funds in the Stock Market When Fixed Costs Prevent Some Households from Holding Stocks," American Economic Review, American Economic Association, vol. 91(1), pages 128-148, March.
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    4. Fischer, Stanley, 1972. "Assets, Contingent Commodities, and the Slutsky Equations," Econometrica, Econometric Society, vol. 40(2), pages 371-385, March.
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    6. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
    7. 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 333-343, June.
    8. Martin Feldstein, 1985. "The Optimal Level of Social Security Benefits," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 303-320.
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    Citations

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    Cited by:

    1. Kent Smetters, 2005. "Social Security Privatization with Elastic Labor Supply and Second-Best Taxes," NBER Working Papers 11101, National Bureau of Economic Research, Inc.
    2. Gottardi, Piero & Kubler, Felix, 2011. "Social security and risk sharing," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1078-1106, May.
    3. Ebrahim, M. Shahid & Mathur, Ike & ap Gwilym, Rhys, 2014. "Integrating corporate ownership and pension fund structures: A general equilibrium approach," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 553-569.
    4. Werding, Martin & Primorac, Marko, 2018. "Old-age provision in transition: the case of Croatia," Journal of Pension Economics and Finance, Cambridge University Press, vol. 17(4), pages 576-593, October.
    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. Corneo Giacomo, 2018. "Ein Staatsfonds, der eine soziale Dividende finanziert," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 19(2), pages 94-109, July.
    7. Hurst, Erik & Willen, Paul, 2007. "Social security and unsecured debt," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1273-1297, August.
    8. 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.
    9. Peter A. Diamond, 2018. "The Future Of Social Security," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 661-681, April.
    10. Jeffrey R. Brown & Zoran Ivković & Paul A. Smith & Scott Weisbenner, 2008. "Neighbors Matter: Causal Community Effects and Stock Market Participation," Journal of Finance, American Finance Association, vol. 63(3), pages 1509-1531, June.
    11. Mattia Landoni & Stephen P. Zeldes, 2020. "Should the Government be Paying Investment Fees on $3 Trillion of Tax-Deferred Retirement Assets?," NBER Working Papers 26700, National Bureau of Economic Research, Inc.
    12. Nikolaos Kokonas & Herakles Polemarchakis, 2017. "Debt and welfare in economies with land," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(4), pages 805-824, December.
    13. Wolfgang Kuhle, 2014. "The Optimal Structure for Public Debt," Metroeconomica, Wiley Blackwell, vol. 65(2), pages 321-348, May.
    14. Smetters, Kent, 2006. "Risk sharing across generations without publicly owned equities," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1493-1508, October.
    15. 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.

    More about this item

    JEL classification:

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

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