Should We Turn Social Security into America's Sovereign Wealth Fund?
A Novel Way to Fix Social Security
One of the first things I learned in Econ 101 was that I should not expect Social Security…the second is that demand curves are (almost) always downwards sloping…or was it upwards?…wait
Almost a decade later, Social Security is still barreling toward insolvency, and innovative solutions are urgently needed. Recently, I came across a fascinating discussion featuring entrepreneur David Friedberg on a recent episode of the All-In Podcast (Short Linked here: David Friedberg: How to Save Social Security Using Compound Interest), which reignited my curiosity on this very issue.
Friedberg argues for a bold proposal: to invest Social Security Trust Fund assets into equities, transforming it into a sovereign wealth fund. His logic is straightforward yet provocative. Had Social Security been invested in the S&P 500 starting in 1971, it would now boast a staggering balance of approximately $15 trillion—wealth collectively owned by Americans. Instead, we've confined our largest retirement safety net exclusively to low-yield Treasury bonds, resulting in significantly lower returns and a looming solvency crisis.
This idea, controversial as it might initially sound, demands thorough exploration.
The Current State and Fundamental Problem of Social Security
Social Security was created under President Roosevelt in 1935 to combat poverty among seniors, initially structured on a pay-as-you-go model, funded by current workers paying into a pool from which current retirees draw. While initially effective, this system has evolved into something problematic:
"Pay-as-you-go" reliance: Current contributions are immediately spent on current retirees, creating no genuine wealth accumulation.
Government "Double-Dipping": The government borrows from the Social Security Trust Fund by issuing Treasury bonds—effectively paying itself with money it owes to future retirees, thereby using Social Security as a backdoor financing tool for government operations.
Ponzi-like Demographic Dependency: The sustainability of Social Security fundamentally depends on favorable demographics. When established, there were approximately 42 workers per retiree. Today, that ratio has plummeted to approximately 2.8 workers per retiree—and it's still shrinking, jeopardizing the system's solvency.
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Social Security as a Sovereign Wealth Fund
David Friedberg proposes addressing these challenges head-on by fundamentally shifting Social Security’s investment strategy into equities. On a recent episode of the All-In Podcast, Friedberg vividly articulated the missed opportunity and its stark implications:
"So here's the math: if in 1971, which was the year that we went off the gold standard in the US, if we invested the Social Security Trust Fund in the S&P, the balance of the Social Security trust fund today would be $15 trillion.
That would be roughly one-third of the value of the total S&P 500, which would be jointly owned by all Americans.
Now here's what's fcked up: the middle-class people who had access to private retirement accounts benefited by buying the S&P 500, and the wealthy were able to access it.
So all of the equity value that accrued from American enterprise and the prosperity of the American system accrued to the people that had access to the private accounts. Meanwhile, the people that only had access to the public accounts got stuck owning treasuries.
Today, the Social Security Trust Fund has a $2.7 trillion balance, and based on the outflows and inflows, it's going to go bankrupt in 2032.
So I did the math: If you assume that the S&P 500 continues to grow at 10.5% per year on average, we could put about $500 billion in the trust fund today, and it will not go bankrupt again.
And importantly, this becomes the world's largest sovereign wealth fund ever. You don't need a separate sovereign wealth fund. We already have one.""
Friedberg’s argument underscores a profound missed opportunity—to ensure solvency and distribute the fruits of American economic prosperity to all Americans, not just those who have the opportunity and capital to engage in the market.
Historical missed opportunity: The S&P 500 has historically returned approximately 10.2% annually, compared to Treasury bonds' 5.3%.
Sovereign Wealth Model: Countries such as Norway, Abu Dhabi, and China manage vast sovereign wealth funds successfully by investing broadly in global equities. These models show that public funds can achieve significant returns with the proper governance structure and independence.
A Free-Market Critique
However, not everyone shares Friedberg’s enthusiasm. Critics from a free-market perspective voice several fundamental objections:
Compulsion & Individual Liberty: Mandatory government retirement schemes violate the right to personal choice over retirement planning and investment strategies.
Government Intervention & Market Distortions: A massive governmental entity holding equities would inevitably create market distortions, affecting corporate governance and investment decision-making and potentially incentivizing political interference in private enterprises.
Risk & Volatility: Equities offer higher returns precisely because they are riskier. Critics argue that entrusting the public safety net to stock market volatility could create severe disruptions, particularly during downturns.
Short-Term Distortions and Political Hurdles
Another significant challenge is market reaction and short-term volatility. If investors anticipated Social Security's potential shift from bonds into equities, markets could experience significant immediate volatility:
Equities Rally: Anticipating a massive injection of capital into the stock market, equity valuations could surge dramatically—potentially inflating asset prices in an unsustainable bubble.
Bond Sell-off: Conversely, massive selling of Treasury bonds would drive bond prices down, increasing yields, which could significantly raise borrowing costs and disrupt debt markets.
Political Reality: Politicians fear precisely these messy, volatile transitions—potential market disruptions can severely impact short-term economic stability, creating pressure on policymakers even if long-term outcomes look favorable.
Despite these genuine concerns, the current path is unsustainable. Social Security will be insolvent within a decade. Thus, action—even if painful—is urgently needed.
Toward a Balanced and Practical Solution
Can we reconcile Friedberg's visionary reform with practical economic prudence?
A practical, hybrid solution might involve:
Independent governance: An insulated board free from direct political influence, modeled on successful sovereign wealth funds like Norway’s, managing investments with clear fiduciary duties.
Phased and diversified implementation: Gradually shifting portions of assets into equities, spreading risks across multiple asset classes to mitigate short-term volatility.
Safeguards for beneficiaries: Building protective buffers—such as maintaining substantial liquidity in bonds—to ensure uninterrupted benefit payments even during market downturns.
This careful, staged approach might help capture equity premium returns while responsibly addressing free-market criticisms and minimizing short-term market disruptions.
Worth Exploring?
As Friedberg suggests, there's potential for Social Security to transition from an impending fiscal liability into America’s sovereign wealth fund, owned collectively by citizens, harnessing the productivity of American enterprise. While challenges are significant—politically, economically, and ideologically—the gravity of the looming insolvency demands courageous exploration of innovative solutions.
Perhaps it's time to engage seriously with this bold vision. Given the complexity, I'd welcome collaboration with economists, financial analysts, and policymakers interested in thoroughly mapping out the math, transition logistics, risk management strategies, and governance structures that could make this reform viable.