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 the growth rate of capital are small.
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