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Social Security Investment in Equities

  • Peter Diamond
  • John Geanakoplos

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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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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  1. 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.
  2. Martin Feldstein, 1982. "The Optimal Level of Social Security Benefits," NBER Working Papers 0970, National Bureau of Economic Research, Inc.
  3. John Geanakoplos & Olivia S. Mitchell & Stephen P. Zeldes, . "Social Security Money's Worth," Pension Research Council Working Papers 98-9, Wharton School Pension Research Council, University of Pennsylvania.
  4. 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.
  5. 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.
  6. Fischer, Stanley, 1972. "Assets, Contingent Commodities, and the Slutsky Equations," Econometrica, Econometric Society, vol. 40(2), pages 371-85, March.
  7. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
  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.
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