Working Paper: NBER ID: w7739
Authors: Andrew B. Abel
Abstract: With fixed costs of participating in the stock market, consumers with high income will participate in the stock market, but consumers with lower income will not participate. If a fully-funded defined-contribution social security system tries to exploit the equity premium by selling a dollar of bonds per capita and buying a dollar of equity per capita, consumers who save but do not participate in the stock market will increase their consumption, thereby reducing saving and capital accumulation. Calibration of a general equilibrium model indicates that this policy could reduce the aggregate capital stock substantially, by about 50 cents per capita.
Keywords: Social Security; Stock Market; Equity Premium
JEL Codes: H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Social Security portfolio changes (H55) | aggregate capital stock (E22) |
| Social Security sells bonds (H55) | buys equities (G12) |
| buying equities (G12) | reduced national saving (H69) |
| income effect on middle-income consumers (D12) | increase in consumption (E21) |
| middle-income consumers increase consumption (D12) | reduced national saving (H69) |
| Social Security portfolio changes (H55) | consumption and saving behavior (E21) |