Social Security Investment in Equities I: Linear Case
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.
Diamond, Peter A. and Geanakoplos, John, "Social Security Investment in Equities I: Linear Case" (2001). Cowles Foundation Discussion Papers. 1573.