Should the Social Security Trust Fund Hold Equities

Henning Bohn

Review of Economic Dynamics, 1999, vol. 2, issue 3, 666-697

Abstract: In a stochastic economy with overlapping generations, fiscal policy affects the allocation of aggregate risks. The paper shows how to compute the welfare effects of marginal policy changes that shift risk across cohorts, in general and for an application to social security equity investments. I estimate the relevant correlations between macroeconomic shocks and equity returns from 1874-1996 U.S. data, calibrate the model, and find positive welfare effects for equity investments. Since stock returns are positively correlated with social security's wage-indexed benefit obligations, equity investments would also help to stabilize the payroll tax rate. (Copyright: Elsevier)

Keywords: social security; equity investment; risk sharing; overlapping generations; welfare (search for similar items in EconPapers)
JEL-codes: E62 H55 (search for similar items in EconPapers)
Date: 1999
Note: A technical appendix is available, see the handle RePEc:red:append:bohn99
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Citations: View citations in EconPapers (42)

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DOI: 10.1006/redy.1999.0062

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