A Trillion-Dollar Hedge against the US Retirement Crisis
Most proposed solutions to the US retirement crisis boil down to a simple maxim: Spend less, save more.
That makes sense. “Enough money” is an important component of building a retirement system that works. Fiduciary oversight and high returns won’t do much for an underfunded system, so it’s easy to see why discussions about reform quickly land on a simple question: Where to send the bill?
There are more productive places to take the conversation.
Back in 2010, inspired by a Wall Street Journal article, an online commenter known as “Beowulf” observed that the US Treasury theoretically has the power to mint a trillion-dollar coin. Beowulf’s coin idea gained further currency amid the debt ceiling debates of 2011 and 2013. The Obama administration, coin proponents said, could forego negotiations with the US Congress by just minting a trillion-dollar platinum coin and paying off the debt.
Platforms as wide-ranging as The New York Times, the American Enterprise Institute, and MSNBC discussed the proposal. A former director of the US Mint even said that minting the coin was not only legal but (at the time) expedient.
My contention is that this “silly but totally legitimate” loophole could be used to endow a US sovereign wealth fund.
Just in Time
The US Government Accountability Office released a 173-page survey of our fast-approaching retirement crisis a few days ago.
Things are bad. The growing striation in US incomes contributes to a significant and widening disparity in retirement savings. Fidelity suggests that savers should seek to have 10-times their income stashed away by age 67.
Only the highest quintile of earners has anything near that.
These private savings are a crucial buffer for retirees. The absolute maximum Social Security benefit a person retiring in 2018 can receive is $44,376. But that is still just 43% of the lowest base salary the person receiving such benefits would have earned prior to retirement. And most people are not so fortunate: The average Social Security benefit is closer to $16,000 a year and about three of five Social Security recipients rely on the program for at least half of their total income.
Moreover, accelerating changes to the US demographic structure will make Social Security’s income-based funding model less and less sustainable. By 2035, just 2.2 workers will be supporting each Social Security beneficiary, according to estimates, compared to 2.8 workers today.
And those figures assume that demographics aside, the nature of work won’t be much different in 2035 than it is today. But as Y Combinator president Sam Altman noted, artificial intelligence (AI) is developing rapidly with potential ramifications for workers. In particular, Altman referenced an OpenAI bot that recently defeated some of the top human Dota 2 players. Soon after the bot’s victories, a new version was created that exceeded the capabilities of the undefeated one. According to recent estimates, AI could outmatch humans at translation by 2024, and earlier this month, Google unveiled headphones that it claims can translate 40 languages almost in real time.
The technological shifts don’t need to be all that significant to significantly impair people’s ability to earn a living.
As progress in AI marches onward and reshapes the nature of work, the elderly will continue to depend on a retirement system that requires many incomes to function.
Even without the forthcoming transformation of the workforce, the funding picture for Social Security doesn’t look great.
What happens if fewer people are working by 2025? What if, as PwC estimates, “fewer” translates to the elimination of 38% of US jobs by the 2030s? Peter Norvig, Google’s director of research, “certainly see[s] that there will be disruptions in employment.” Treasury Secretary Steven Mnuchin is not so worried, and I hope he is correct.
If he’s not, a cash flow of “just” negative $174 billion in 2025 will seem fairy-tale optimistic.
Learn from the Guardians
Other countries have felt these headwinds and done something about them.
New Zealand is a case in point, as I learned at CFA Society New York‘s 3rd Annual Sovereign Wealth Fund conference. (These forums are strictly Chatham House Rules, but I can still tell you what I googled afterward.)
The New Zealand Parliament recognized the mounting challenges the country’s demographic trends posed and in 2001 endowed a sovereign wealth fund to counteract them. The government will begin to withdraw money in 2035–2036, but the fund is expected to continue growing until 2073.
It has already served its purpose quite well.
A strong internal culture of alignment with beneficiaries — employees refer to themselves as “guardians” — has propelled this growth. So too has a remarkable governance structure and the innate advantages that sovereign wealth funds enjoy. These kinds of investing entities can be remarkably pro-social. They don’t just provide a direct link between market progress and social welfare, they also build, buy, and operate infrastructure; stabilize currencies; and prove up new asset classes.
Imagine how much economic anxiety in the United States could be soothed by such a mechanism.
Matthew O’Brien wrote in 2013, at the height of the debt ceiling debate, that the trillion-dollar coin “might just be the crazy solution Washington deserves and needs.” Today, if properly governed and given time to mature — a 30-year plus horizon would be ideal — a sovereign wealth fund bankrolled by that trillion-dollar coin might just be crazy enough to cushion the approaching impact of the US retirement crisis.
At the very least, it would give Americans a tangible reason to worry less about how they will afford to eat in their old age.
Solving this crisis will take a concert of ideas and actions. CFA Institute Members can download our new app to discuss this idea and others with professionals from around the world.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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4 thoughts on “A Trillion-Dollar Hedge against the US Retirement Crisis”
It is disappointing to see an official rep of CFA Institute advocate for taxpayer-funded “pro-social” sovereign wealth funds whose investment mission evidently is explicitly political (“build, buy, and operate infrastructure; stabilize currencies; and prove up new asset classes”). Such activities carry obvious risks of cronyism, outright corruption, and the wasting of public resources when investments aimed at promoting “social welfare” (another phrase Ms. Ortel used approvingly in the above essay) inevitably go sour. I am familiar with Norway’s sovereign wealth fund and am pretty certain its mission and governing statutes make no provision at all for channeling any assets toward public policy goals other than assuring income for retirees; it is managed like a hedge fund and any political interference in investment decisions is strictly prohibited.
Endorsing the minting of a coin to erase the national debt is even more reprehensible (even if legal — which is debatable, at best). My recollection is the Obama administration, to its credit, stated in 2013 that it had determined that the trillion-dollar coin expedient was neither legal nor desirable as an Executive Branch expedient for overriding the wishes of a GOP-controlled Congress. Of course the GOP’s cynical efforts to wreck the economy to embarrass Obama deserve condemnation; but for an administration to use legal sleight-of-hand to win political fights it couldn’t win at the ballot box would be equally destructive. (And remember the government lawyers George W. Bush ordered to write memos saying torture isn’t torture? A few years later, those lawyers barely avoided going on trial themselves.)
Many thanks for leaving this thoughtful and nuanced comment. It’s probably best for me to start by saying that I didn’t intend to imply that sovereign funds ought to operate as political vehicles. In fact, the opposite. The double arms length structure that NZ Super operates inside of is critical to its operations and entirely irreplaceable. Oversight drives behavior.
In characterizing these as pro-social vehicles, I meant that their time horizon opens them up to some pretty creative investing which has positive effects that are good for the world. I did not mean that they should do something akin to an infrastructure bill. These funds sometimes do buy and operate infrastructure assets for their own accounts though, and I do think that such actions can be pro-social.
The overall intent of the post was to move the conversation about retirement outside of its tired and traditional confines. I do work for CFA Institute, but I am not putting forward an official opinion. All posts on Enterprising Investor are the opinion of the author.
I hope you are somewhat less disappointed after those clarifications. I share your view that sole focus on delivering results to the end client is the only way to operate such a pool of capital.
I brought up the coin because it is a desperate solution for what I see as a desperate problem. I am 29, and will see my lifetime income shaped by the labor force dynamics I describe above. A trillion dollars raised by magic, overseen perfectly, and invested brilliantly would not be enough to prepare fully. That’s what I was trying to convey.
Thanks very much for reading and for sharing your thoughts. I appreciate both and wish you a great weekend.
The headline was eye grabbing. But the article quickly turned toward something way different and just became Another Article.
Wouldn’t it be easier just to have the Federal Reserve “unwind” its balance sheet by turning it over to the Social Security administration? The money would be doled out over time, the assets are the same type currently in the so-called Trust Fund…