Government pension systems vary widely from country to country. Evidence from a cross-section of 110 countries indicates that structural di¤erences in public pension programs are related to reallocation of …nancial capital around the world. More specifically, we …nd that greater amounts of pension spending are associated with overall net international indebtedness and a net portfolio characterized by equity assets and debt liabilities. We present a two-country overlapping-generations model that can replicate these empirical regularities and elucidate the link between the structure of pension bene…ts and the resulting portfolio choices of economic agents. In the country with state-guaranteed pension bene…ts, workers face a lower overall riskiness of lifetime wealth. As a result, they are willing to invest in risky equity …nanced by the selling of domestic bonds. Workers in the country with no pension system, on the other hand, tend to be net savers and favor safe debt assets in their portfolios. These …ndings can help to explain the buildup of global …nancial imbalances over the last three decades as well as to analyze future changes in capital allocation patterns due to the ongoing pension system reforms in many developing and developed countries.

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