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.
Diamond, Peter A. and Geanakoplos, John, "Social Security Investment in Equities in an Economy with Short-Term Production and Land" (2000). Cowles Foundation Discussion Papers. 1510.