Impact of pension system structure on international financial capital allocation

Recent findings indicate that pension system structure affects private savings and through them the aggregate foreign asset position of a country. We present a two-country overlapping-generations model that explores the relationship between the magnitude of pension guarantees and the resulting portfolio choices of workers. The existence of a pay-as-you-go pension system lowers the wealth of the young workers, who consequently borrow from abroad to supplement their current consumption, and lowers the overall riskiness of their lifetime wealth, prompting them to invest in risky equity financed by the selling of safe bonds. In particular, we are able to replicate and explain the ”venture capitalist” (positive net equity accompanied by negative net debt) portfolio profile of the United States. More broadly, we find empirical support for our results in a cross-country analysis using data from 110 economies: greater amounts of pension spending are associated with international indebtedness, long equity positions, and short debt positions.