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Social Security Investment in Equities in an Economy with Short-Term Production and Land

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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 via private accounts. The analysis depends critically on heterogeneity in saving, in production, in assets, and in taxes. Under fairly general assumptions we show that limited diversification increases a neutral social welfare function, increases interest rates, reduces the expected return on short-term equity (and thus the equity premium), decreases safe investment and increases risky investment. However, the effect on aggregate investment, long-term capital values, and the utility of young savers hinges on delicate assumptions about technology. Aggregate investment and long-term asset values often move in the opposite direction. Thus social security diversification might reduce long-term equity value while it increases aggregate investment.

Suggested Citation

  • Peter Diamond & John Geanakoplos, 2000. "Social Security Investment in Equities in an Economy with Short-Term Production and Land," Cowles Foundation Discussion Papers 1259, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:1259
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    File URL: http://cowles.yale.edu/sites/default/files/files/pub/d12/d1259.pdf
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    References listed on IDEAS

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    1. Olivia S. Mitchell & James F. Moore, "undated". "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.
    2. John Geanakoplos & Olivia S. Mitchell & Stephen P. Zeldes, "undated". "Social Security Money's Worth," Pension Research Council Working Papers 98-9, Wharton School Pension Research Council, University of Pennsylvania.
    3. Andrew B. Abel, 2001. "The Social Security Trust Fund, the Riskless Interest Rate, and Capital Accumulation," NBER Chapters,in: Risk Aspects of Investment-Based Social Security Reform, pages 153-202 National Bureau of Economic Research, Inc.
    4. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
    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 333-343, June.
    6. Henning Bohn, 1997. "Social Security reform and financial markets," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 41(Jun), pages 193-227.
    7. 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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    More about this item

    Keywords

    Private accounts; trust fund; diversification; heterogeneity; overlapping generations;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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