SSTF: A New American SWF?

Ashby Monk

Elizabeth Stauderman and Jonathan Weisberg of Qn, a publication of the Yale School of Management, recently interviewed Larry Summers on the topic of SWFs. It’s a great interview, as Summers talks candidly about a variety of topics. Of particular interest to me was his discussion of pension reserve funds. Summers defined this type of SWF as:

“…funds that are accumulated in the context of pension arrangements of one kind or other, where countries quite reasonably seek the benefits of international diversification.”

While he acknowledges that other countries “quite reasonably” have set up these types of SWFs to invest retirement assets, Summers also lists the reasons why such a fund was deemed inappropriate in the United States:

“We’ve made a decision in the United States that the Social Security trust fund should not invest in equities, even through index funds…we’ve made that decision very substantially out of a judgment and concern about the politicization of the marketplace and the politicization of corporate decision-making.”

Summers is referring to the late 1990s when the Clinton Administration considered investing the U.S. Social Security Trust Fund in equities. The proposal was torpedoed due to fears that politicians would have influence over the investments, intrude on the Trust Fund’s operations, and engage in ‘stock picking’ so as to use Trust assets for personal or political gain.

To be sure, the specter of politicians interfering in huge public investment funds is unappealing. However, some evidence from outside of the United States suggests headway has been made on the political issue. Since the 1990s, numerous OECD countries, such as Australia, Canada, France, Japan, Ireland, Korea, New Zealand, Norway, and Sweden, have all decided to pre-fund and invest their SS assets in equities (most of them actively). In this process, all of these countries designed and implemented new governance practices that explicitly sought to immunize their reserve funds from political influence.

Take Canada as a case study: many Canadians raised similar political concerns during the 1997 debates that created the Canada Pension Plan and its corresponding Investment Board. In response, the politicians that designed Canada’s system did their best to make the CPP a largely autonomous entity with investment decisions placed well beyond the reach of any politician or interest group. In fact, the 1997 legislation explicitly rejected all political or social investing objectives and defined the welfare of plan participants as the singular focus of the CPPIB. In addition, the founding legislation requires changes to the CPP program – including changes to the set-up of the CPPIB and its investment mandate, or to CPP benefits and contribution rates – be approved by the federal government and two-thirds of the provinces representing two-thirds of the population. This is a level of exigency greater than that required to change the Canadian constitution.

In sum, Summers’ comments about the Trust Fund reminded me of two things: 1) The idea of diversifying SS Trust Fund assets was taken quite seriously in the 1990s until political concerns thwarted the effort; and 2) there exists today governance practices designed explicitly to deal with these same political concerns, which means the main roadblock that stopped the policy in the 1990s isn’t necessarily a road block today.

This then leads to an interesting thought experiment: could the US borrow and modify the the new governance practices developed by other countries to transform the Social Security Trust Fund into a pension reserve fund? Probably not. The possibility of such a policy being taken seriously (especially after the financial crisis) in Washington today is beyond remote. But I think the idea is worth revisiting. If other countries are pre-funding and diversifying their SS assets so as to manage population aging all the while limiting the influence of politics, why can’t the US?

To be sure, there are still other debates to consider when thinking about investing SSTF assets actively, such as risk adjusting (this is a biggie). But I expect such debates also took place in Australia, Canada, France, Japan, Ireland, Korea, New Zealand, Norway, and Sweden…

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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