Investing social security in the equity market : does it make a difference ?

We show that investing social security in the equity market makes no difference under three assumptions: (1) the transition generation is compensated by public borrowing, (2) the benefit rule is unchanged, and (3) individuals’ portfolio choices are unconstrained. We also show that when these assumptions do not hold, the reform is not neutral; it can be Pareto improving but it can also be Pareto worsening. This depends particularly on the way portfolio choices are constrained. For example, if a majority of households are kept away from the equity market because of liquidityconstraints, investing part of their contributions in the equity market can be Pareto improving.