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

Rodney L. White Center for Financial Research WP 03-99

Posted: 29 Mar 1999

See all articles by Andrew B. Abel

Andrew B. Abel

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: 1999

Abstract

This paper develops a tractable stochastic overlapping generations model to analyze the equilibrium equity premium and growth rate of the capital stock in the presence of a defined-benefit Social Security system. If the Social Security Trust Fund increases the share of its portfolio held in risky capital, the equilibrium equity premium falls in the following period and along a constant growth path. This change in the portfolio of the Social Security Trust Fund will increase the growth rate of capital in the following period, and, if a certain sufficient condition is satisfied, will increase the growth rate of the capital stock along a constant growth path. Calibration of the model indicates that it can match the historical average equity premium and the historical average growth rate of the capital stock using plausible values of the preference parameters. In addition, the sufficient condition for the growth rate of the capital stock to increase along a constant growth path is satisfied. Quantitatively, the effects on the riskless interest rate and growth rate of capital are small.

JEL Classification: E22, H55

Suggested Citation

Abel, Andrew B., The Social Security Trust Fund, the Riskless Interest Rate, and Capital Accumulation (1999). Rodney L. White Center for Financial Research WP 03-99, Available at SSRN: https://ssrn.com/abstract=152535

Andrew B. Abel (Contact Author)

University of Pennsylvania - Finance Department ( email )

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