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The Trump campaign and the Biden-Harris administration floated the idea of ​​establishing a US sovereign wealth fund a few weeks ago, which is generally a bad idea for the United States, but there is at least an interesting version of the idea.
For a SWF, one needs sovereign wealth, specifically a surplus of sovereign wealth. The United States of America does not have any surplus, as there is no excess accumulation of foreign exchange reserves, as is the case in both Singapore and China, and there are no huge cash flows from gas and oil, like Norway and Saudi Arabia. Rather, the United States suffers from a large budget deficit, and uses… Any money available from oil, to reduce this deficit.
In the absence of a surplus, there are other ways to raise money, such as issuing debt or imposing new taxes or tariffs, which are often just ways to move money from one place to another. In fact, the money the government collects from taxes and borrowing can be invested or spent elsewhere. There will be no net benefit unless the government invests it in a way that grows or is strategic.
Add to this political obstacles (it is easy to imagine Congress’s position on a pile of money that lies outside its authority), redundancy (federal programs already target sectors that a fund might support), and market effects (crowding out, asset inflation).
But there is a fund of American funds that can benefit from higher returns, as Social Security, or the American pension program for citizens, suffers from a weak financial outlook.
At one time, payroll tax revenues exceeded the plan for retirement expenses, and excess cash was invested in Treasury bonds, but beginning in 2021, expenses began to exceed inflows, and the Social Security Administration began withdrawing saved funds to make up the difference.
The Congressional Budget Office expects that reserves, which currently stand at about $2.7 trillion, will be exhausted within ten years. Retirement benefits will continue to be paid after the money runs out, but without a new source of funding, so the value of the benefits will be reduced by 23% initially, and may continue to decline as the American population ages.
Senator Bill Cassidy, Independent Senator Angus King, and a group of experts and economists have proposed the idea of ​​reinvesting Social Security fund funds in the market to achieve higher returns.
Now to take the idea further, the US government could borrow at the interest rate of long-term Treasuries (4% or so), and invest in US stocks (average long-term returns of 6-7%), with the arbitrage proceeds then going into funds. Social Security reserve.
This could effectively allow the US government to establish a sovereign wealth fund with one specific goal: achieving better returns for a better-funded pension plan. There are no strategic investments in emerging sectors of the kind envisioned by Harris and Trump, but merely arbitrage.
Could this work? We have modeled very simple three scenarios: the first is to invest existing reserves in the market (not arbitrage per se), the second is to invest the reserves and an additional $1.5 trillion raised through a bond issue, and the third is to invest existing funds and borrow what might The government needs it to fund Social Security until 2055.
In this context, we assumed the following:
• We assumed that funds invested in US markets would achieve the usual historical returns of 6.9% annually, ignoring the very real possibility that this average would change at intervals over the coming years. In other words, we ignored the political and financial ramifications that would arise from a potential market collapse.
• We also assumed that government purchases of shares would be tax-free upon sale.
• We ignored the possibility that a massive new offering of Treasuries would push yields higher from current levels, and the possibility that a multi-trillion government investment in US stock markets would inflate asset prices and reduce returns.
• We simply assumed that new money would enter the fund at the beginning of the year, and that dues would be paid at the end of the year.
We found, based on these assumptions, that investing current reserves of $2.7 trillion in stocks, not Treasuries, would only extend the life of the reserves until 2040, or just six years.
For the second scenario, reserves would be increased by $1.5 trillion of money raised today at the current 30-year Treasury bond yield, and the new money would be left to accumulate until 2040, at which point it would begin to be spent.
This massive cash infusion will only extend the life of the fund until 2046, but it is still a good thing and benefits from the arbitrage between government borrowing rates and average market returns, but it still gives Social Security only an additional 12 years, according to the latest Congressional Budget Office estimates, and at the same time It would increase US debt by 4% for just one year, doubling the annual budget deficit.
In the third scenario, we calculate the money that would fully fund Social Security by 2055. To do this, the US government would need to borrow and invest just under $2.4 trillion today.
Even under the most positive assumptions, the additional returns provided by stock markets will do little to solve Social Security’s financing problems, yet massive inflows of funds are still required. Although additional returns would be beneficial, they would come with various real risks that we ignored in our hypothetical model, not to mention the possibility of political discord and market distortion.
