Social Security Reduces Demand for Stocks, Driving Up Equity Returns.
Social security plays a significant role in explaining why stocks have higher returns than bonds, known as the equity premium puzzle. When social security is in place, it reduces the demand for bonds by middle-aged individuals, limiting young people's ability to buy stocks. This leads to lower demand for stocks and higher returns on them. Additionally, social security increases the connection between future spending and stock earnings for young people. Overall, social security and borrowing limits can create a realistic equity premium.