Changing the United States Social Security Trust Fund Into a Sovereign Wealth Fund

While politicians wring their hands over the fate of the United States Social Security Fund, and bemoan the lack of options available to the American people, a simple solution has been tried and tested by several different modern economies, which have brought increased protection, increased wealth, and stability to their respective government retirement pension fund systems.  The United States Social Security Fund is currently funded by payroll tax contributions by employees with a match from their respective employers.  While the United States Social Security Fund has a current valuation of $2.9 trillion, the Fund is expected to exhaust its surplus in 2034.   The Fund does invest the contributions to the Social Security Fund into US government bonds, earning 2.5% interest.  In contrast the Norwegian Government Pension Fund earned 10.9% interest in 2020.

There are immediate steps that the US government can take now without resorting to increasing contribution rates, or extending the age limit of when Americans can receive full retirement benefits.  Besides these immediate steps, there are several different ways the Social Security Trust Fund and be made sound, stable and with increased benefits to the American people.

Different Social Security Funds Worldwide

One of the largest pension funds in the world is also the 2nd largest sovereign wealth fund in the world.  The Norwegian Government Pension Fund is actually two different funds.  There is the Norwegian Government Pension Fund Global (GPFG) and the Norwegian Government Pension Fund Norway (GPFN).  The GPFG invests only in equities, bonds (commercial and government debt) and real estate world-wide but is excluded from investing in the Scandinavian countries and in Norway.  The GPFN invests only in Scandinavian companies and Norway.  The GPFN only invests in equities that are listed on the Oslo stock exchange, and in bonds (commercial and government) and in real estate in the Scandinavian countries.  The Norwegian fund was originally funded through oil revenue from its offshore oil fields.  Eventually it began passive investing in other government’s debt, and has evolved to where it invests in equities world-wide.  In 2020, the Norwegian sovereign wealth fund had a 10.9% return on investment, or $122.7 billion.

The new CEO of the Norwegian Government Pension fund is Nicolai Tangen, the founder of AKO Capital (one of the largest private investment banks in Europe).  Mr. Tangen was a controversial choice, and he has already stamped his personality on the investment arm of the fund.  He is creating “safe zones” for the professional investors of the fund to encourage more risk taking in search of higher profits.    The current value of the fund is $1.3 trillion.  (The fund is valued in kroner, with a current exchange rate with the US at 6.5).  The fund solely exists to fund the retirement of its citizens and its future citizens.

The Government Pension Investment Fund (Japan)

The Government Pension Investment Fund (GPIF) is one of the largest pension fund in the world, only behind the social security fund of the United States.  The GPIF has assets of $1.62 trillion.  The GPIF exists for the retirement needs for the civil service and public employees of Japan.  Unlike the social security fund of the United States however, the GPIF depends upon its investments in securities, equities, and real estate to fund its operations and disbursements.  The fund invests in a mix of domestic and international equities and bonds.  The bulk of the investment portfolio of the GPIF is managed by private external money managers, who are closely monitored by GPIF managers.  The Fund places an emphasis on long term stability with an eye to preserve the principal of the Fund, but also grow it to meet the needs of future generations of public employees of Japan.  Diversity is a key element for the Fund, so there are different asset classes, geographic locations, and timeframes.

Another element to the fund’s investment strategy is the use of environmental, social, and governance (ESG) investments in its portfolio. The rationale behind this is that socially responsible investing enhances returns for the long-term. The portfolio includes investments in ESG indexes as well as bonds that are both green and sustainable.

In 2018, the Fund instituted a change in how private money managers are compensated.  If the managers meet a specified level, their compensation remains as it was.  If the return on investment is lower than the stated level, their compensation is lowered.  If they exceed their goals, then there is increased compensation.  This is a trend in pension funds which are also sovereign wealth funds; taking on more risk for higher returns on investment.

Stabilizing the US Social Security Fund

In 2019, the Social Security Fund had receivables of $1.1 trillion.  The Fund expended $892 billion in 2019.  As of 2021 the Social Security Fund had assets of $2.9 trillion.  Yet, as previously noted, the Fund surplus will be exhausted by 2034.  With the government deadlocked on how to avoid the end of the surplus and the reduction in benefits to the American people, new ideas need to be examined and tried.

The reallocation of funds currently earned by the US government would seem to be the most logical place to start.  In 2020, the Federal Reserve Bank deposited $88.5 billion into the US Federal Treasury from its earnings on its Federal Open Market operations.  Diverting these earning from the Federal Treasury to the Social Security Fund would help the Social Security Fund to put off the depletion of its reserves. 

A more effective way of increasing the assets of the Social Security Fund would be to allow the Social Security Fund to use its $2.9 trillion cash reserve to invest in private equities, corporate debt, and private real estate.  The Norwegian GPFG achieved a 10.9% return on investment for 2020. 

Had the Social Security Fund been allowed to invest as numerous other pension funds do, it would have earned $316 billion in 2020, assuming the same rate of return of the Norwegian sovereign wealth fund. 

Combined with the $88.5 billion from the Federal Reserve, instead of a surplus of $2.9 trillion, the Social Security Fund would have a surplus of $3.45 trillion. 

Instead of creating a new governmental agency, it would be a simple matter to have the Federal Reserve become the agency that would oversee the investment of funds from the Social Security reserves.  Since the Fed already “earns” money for the US Treasury, it makes sense to expand the scope of the Open Market Committee to include investment making decisions and monitoring the investments.

It is beyond time to revamp the Social Security Fund, and to shore up the retirement pensions of the American people, and the interests of the American people be placed first instead of the interests of corporate America.

Richard E. Caroll
Richard E. Caroll
I am a retired economist, and a retired soldier. I have a degree in Economics and a degree in Liberal Arts. While in the military my specialty was in Intelligence and Administration.