Investing Public Pensions in the Stock Market: Implications for Risk Sharing and Asset Prices

Policymakers worldwide are contemplating investing public pension assets in the stock market -- or allowing their citizens to make this choice -- and many countries have recently begun to do so. This is motivated by concerns that existing public systems will be unable to provide benefits to a rapidly aging population without sharp increases in taxes on future workers, and by the perception that the higher average return on stocks could help alleviate these pressures. Economists have also suggested that including stock market investments in public pension plans could improve risk sharing within and between generations. In this paper we evaluate these arguments qualitatively and quantitatively. We consider the implications of such policies for asset prices and risk sharing using a calibrated overlapping-generations model.