Chapter

The Role of International Investment in a Privatized Social Security System

Marianne Baxter and Robert G. King

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: http://dx.doi.org/10.7208/chicago/9780226092560.003.0011
The Role of International Investment in a Privatized Social Security System

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Many proposals to reform the current social security system would permit the investment of retirement funds in risky assets such as equities. This chapter asks whether there is an important role for international financial assets in a privatized social security system. It shows that international equities provide significant diversification benefits and should be very attractive to retired investors who are currently holding either the real annuity provided by social security or a risky portfolio of domestic assets. The chapter first provides an overview of social security, focusing on the nature of its cash flows. It then explores the consequences of allowing individuals to add risky assets to their retirement portfolios, provides evidence on the behavior of labor income, and analyzes the benefits of a reformed social security system that allows retirees to earn returns on the basis of an optimal investment in the stock market during the retirement period. Finally, the chapter considers the issue of how retirement funds should be invested during the working years.

Keywords: social security; international financial assets; international equities; diversification; cash flows; risky assets; labor income; stock market; retirement funds

Chapter.  25217 words.  Illustrated.

Subjects: Economic Systems

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