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

Peter Diamond and John Geanakoplos (john.geanakoplos@yale.edu)
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John Geanakoplos: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/john-geanakoplos

No 1259, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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.

Keywords: Private accounts; trust fund; diversification; heterogeneity; overlapping generations (search for similar items in EconPapers)
JEL-codes: D50 D60 D91 G11 G28 H55 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2000-06
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