The Social Security Trust Fund, the Riskless Interest Rate, and Capital Accumulation

Andrew B. Abel

in Risk Aspects of Investment-Based Social Security Reform

Published by University of Chicago Press

Published in print December 2000 | ISBN: 9780226092553
Published online February 2013 | e-ISBN: 9780226092560 | DOI:
The Social Security Trust Fund, the Riskless Interest Rate, and Capital Accumulation

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This chapter considers the existence of a defined-benefit pension system in which a social security trust fund is accumulated as a buffer between payroll tax receipts and pension expenses of the system. It uses the overlapping-generations model to explore the effects of shifting the trust fund from riskless bonds to risky equities. In equilibrium, the trust fund can buy equities only if private investors are willing to sell them. Today's private investors are willing to sell only if the equity premium declines. The chapter assumes that the absolute return on equities is fixed by the marginal productivity of capital, so the decline in the equity premium is accomplished by a rise in the riskless interest rate. It shows that investment of the social security trust fund in equities would be good for capital accumulation and economic growth. The effect is quite small in an almost pure pay-as-you-go system of the sort the United States has today but would be larger in a prefunded system with a more substantial trust fund.

Keywords: social security; trust fund; riskless interest rate; capital accumulation; equity premium; equities; bonds; overlapping-generations model

Chapter.  18250 words. 

Subjects: Economic Systems

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