INTRO: Have you ever wondered why social security
is absolute garbage?
Every year, they collect 12.4% of everybody’s income up to $18,000.
Yet, they’re projected to fall short of their payouts by 2034.
Some people blame it on the pandemic, others blame it on bureaucracy, and others suggest
that it’s simply a side effect of people living longer than ever before.
While all of these are valid points, none of these is the fundamental problem with social
security.
You see, the fundamental problem with social security is that it generates no real wealth.
In 2021, Social Security pulled in $1.118 trillion in income.
But $1.001 trillion of that was from contributions and $41 billion was from income taxes charged
on benefits.
Social security only generated $76 billion in investment-based income which is a measly
2.61% annual return.
Given that that barely keeps up with long-term inflation if that, it’s no wonder why Social
Security is trash when it comes to creating real wealth.
Now, you don’t actually have to worry about social security running out because I’m
sure they’re gonna either increase the tax rate, decrease benefits, and/or print money
to make up the deficit.
But, what if there’s a better solution.
What if instead of investing in low-yielding bonds, social security invested in the stock
market, real estate, and energy not just in the US but internationally.
This would generate true returns for social security, and they would not be nearly as
dependent on contributions.
At first glance, this might sound riskier and it is, but this is exactly what sovereign
wealth funds around the world have been doing for decades.
And the most successful fund of them all is Norway’s Sovereign Wealth Fund also known
as the Oil Fund.
As of December 2021, the Norwegian Fund boasted a total of $1.4 trillion worth of assets.
To put that in perspective, Social Security only controls $2.9 trillion despite the population
being 61 times larger.
On a per-capita basis, Social Security has $8,825 worth of assets per person.
Meanwhile, Norway boasts a whopping $260,271 worth of assets per person.
Norway literally has over a quarter-million dollars worth of assets per person.
Now, I’ve been picking on Social Security thus far, but really, Norway blows the rest
of the world out of the water as well.
China’s wealth fund, for example, controls $1.1 trillion worth of net assets.
But compared to their population, that’s not even $1000 per person.
So, here’s how Norway built the most successful sovereign wealth fund in history.
HISTORY: Taking a look back, the history of Norway’s
wealth fund dates back to the year 1960 when Norway’s prime minister Einar Gerhardsen
got Norway involved in the oil business.
He gave oil companies from around the world licenses to come and search for oil within
Norway.
Oil companies were allowed to keep the profits they generated, but they had to pay petroleum
taxes and leases to Norway to continue operations.
It took a couple of years to get the ball rolling but starting in 1966, oil companies
flooded in looking for oil.
Within the next 4 years, they drilled 37 wells, and on the day before Christmas Eve in 1969,
they struck oil in the North Sea in an oil field called Ekofisk.
This turned out to be the largest oil field ever found at sea, and by 1971, oil production
would begin.
It didn’t take long for Norway to start raking in loads of money, and soon enough,
they started to discuss what to do with the money.
This was not a fast process by any means as it would drag on for 12 years, but eventually,
in 1983, they came to a consensus.
They decided to create a fund that could invest the profits generated from the oil industry
hence the name oil fund.
The best part was that the government was only allowed to spend real returns which are
the returns after accounting for inflation.
This seems like a no-brainer, but it’s not nearly as common in application.
We can’t give Norway too much praise though given that their government was just as slow
as the rest of the world.
It wasn’t till 1990 that Norway actually went ahead and created the fund, and it wasn’t
till 1996 that the fund received its first cash injection from the Ministry of Finance.
It took 36 years to get to this point, but at least they did it, and now, it was time
to invest.
INVESTMENTS: One of the hardest parts of running a successful
investment fund is effectively investing all the capital.
Even investing moguls like Warren Buffett struggle with this issue.
Norway also fell into this trap early on and they would end up investing all of the money
into government bonds.
But, fortunately, just one year later, they diversified heavily into equities.
Norway approved for 40% of the fund’s capital to be invested into equities, and they gave
Norges Bank Investment Management the responsibility of investing the money.
Within just 6 months, the bank converted all 40% into equities, and with that, they were
booming.
In 2000, Norway approved the fund to diversify into 5 emerging markets, so Norges had a pretty
broad set of choices when it came to investments.
But this didn’t mean that they could just invest in anything.
There are 4 main categories that are blacklisted from the fund for various reasons.
First of all, the fund is not allowed to invest in any weapon production companies like Boeing,
Airbus, and Lockheed Martin.
Secondly, the fund is not allowed to invest in any tobacco companies.
Thirdly, the fund is not allowed to invest in any companies that cause environmental
damage.
This one is a bit ironic given that all the money is the fund originated from oil, but
I guess they’re limiting their environmental impact as much as possible.
Anyway, the last major category the fund is not allowed to invest in is companies that
are notorious for human rights violations.
Fun fact, Walmart was blacklisted for this reason till 2019.
With all these guidelines, Norway was chugging along through the 2000s quite strongly, but
then the 2008 financial recession rolled around.
In just one year, the fund lost 23.31% or nearly a quarter of all their investments.
Many people in this situation would panic and sell all their stocks, but Norway wasn’t
concerned.
In fact, they were excited and optimistic to buy the dip.
In 2007, Norway increased the fund’s allocation to equities from 40% to 60%.
And in 2008, they created a 5% allocation for real estate.
Honestly, they couldn’t have played this any better.
They brilliantly bought up the bottom of the market, and they have been rewarded extremely
well.
In 2009, the fund posted a 25.6% return and the fund has grown 5x since the recession.
Today, the fund boasts an annualized return of 6.56% since inception which is a bit lower
than the S&P 500 7-8% annual.
But, the Oil Fund is 18 times as diversified as the S&P 500 with stakes in 9,123 companies
spread across 73 countries.
At the end of every year, Norway reveals all of its stakes in a massive 400-page document.
It would take forever to go through all these, but just skimming over the most notable ones,
they have $21 billion in Apple, $17 billion in Microsoft, $7.8 billion in Facebook, and
$14.5 billion in Amazon.
Considering all this, I don’t think you’d be surprised to hear that the Oil Fund is
the largest stock owner in Europe.
And given how strategically they’ve played the market so far, I think they more than
deserve that title.
WITHDRAWALS: Having all that money is great and all, but
what’s the point if you can’t spend it.
As we previously touched on, Norway is allowed to withdraw real returns from the fund every
year, but Norway didn’t even do this till 2016 when they made their first withdrawal.
Since the 1990s, Norway has averaged about 2% inflation per year, so this would mean
that Norway is allowed to withdraw about 4.5% per year because that’s their real annual
return.
But they don’t even allow for that.
Norway limits its withdrawals to 3% per year which is very similar to the 4% rule with
the S&P 500.
The rule goes that if you withdraw 4% or less every year from an investment into the S&P
500, you’ll never run out of money.
So, it’s again quite smart that Norway has limited withdrawals to 3%.
After all, you don’t want to kill the golden goose.
When the country needs money though, Norway doesn’t hesitate to take out the full 3%.
In 2020, for example, Norway withdrew $37 billion from the fund to battle the pandemic.
Anyway, looking forward, Norway predicts that the worst-case scenario for the fund in 2030
is $455 billion and that the best-case scenario is $3.3 trillion.
If the best-case scenario plays out, the Oil Fund would overtake social security in assets
in the second half of this decade.
And at that rate, the fund would have $1 million per citizen by 2040.
Having said that, there’s no question that the Oil Fund is a massive success financially.
But, critics argue that the fund isn’t nearly as successful when it comes to ethics.
ETHICAL CONCERNS: Probably the biggest criticism against the
Oil Fund is that all of its contributions are derived from oil.
But the truth is if Norway didn’t take advantage of the demand for oil, someone else would’ve
filled the gap.
Over the past 60 years, it simply wasn’t feasible to produce renewable energy on such
a large scale.
So, if Norway avoided oil, it’s not like customers would’ve switched to renewable
energy.
They would’ve just gone to Saudi Arabia or Canada for oil, and these countries have
plenty of oil to make up for the disparity.
So, personally, I don’t believe that Norway did anything unethical by leveraging its resources
or the demand for oil.
Another major criticism against the fund is that their ethical boundaries aren’t enough.
As a country, many argue that they have the responsibility of being a good role model
and supporting productive businesses only.
One of the industries that critics argue the fund shouldn’t be involved in is gambling
and betting.
This has actually been an ongoing issue for many years now, and Norway has taken steps
to ban investments in casinos.
But so far, nothing concrete has taken place, and the fund invested into Draftkings as recently
as March of 2021.
And finally, the third biggest criticism against the fund is that it’s controlled by Norges
bank.
Norges bank basically has full control of the fund, and as long as they don’t break
any guidelines, they can do whatever they want.
The bank does have 500 well-qualified financial professionals, but at the end of the day,
final investment decisions are left to just 17 finance ministry bureaucrats.
When the fund had less than $100 billion, this wasn’t a very big concern.
But now that the fund is reaching into the trillions, these guys have substantial financial
power.
They could use this power to prop up their own investments and/or manipulate the markets.
Aside from having a lot of power, many argue that these leaders aren’t actually that
great when it comes to investing and that hiring better leaders would lead to far better
returns.
While all of these points are fair, I don’t think you can complain too much given how
well the fund is performing in comparison to the rest of the world.
APPLICATION TO THE US: Given how successful the sovereign wealth
fund has been for Norway, would it be possible to apply such a system to the US?
Well, some states in the US already have a sovereign wealth fund like Alaska.
The Alaska Permanent Fund was created back in 1976, and similar to the Oil Fund, the
Permanent Fund is made possible through oil revenue.
As of 2021, the fund had $81.9 billion worth of assets, and they disperse roughly $1600
per year per resident.
So, clearly, such a concept is not foreign to the US; however, it would be quite difficult
to create a national sovereign fund especially if it was funded using contributions.
Here’s the thing, while such a program would be extremely helpful to people with bad spending
habits and little to no investments, it’s not all that helpful for disciplined savers
and investors.
At the end of the day, such a fund is just going to match the market if that.
So, many would far prefer to just do that themselves.
If such a fund was created though, it wouldn’t be all that hard to manage logistically.
For example, if half of Social Securities’ reserves were converted into a wealth fund,
that would entail investing about $1.5 trillion.
While that’s a large amount, it’s quite manageable within the financial world.
After all, BlackRock has nearly $10 trillion under management.
So, creating such a fund would definitely be more of a political issue than a logistical
issue.
Personally, I’d be a fan of converting Social Security into a wealth fund given that any
sort of return would be better than Social Security’s 0% real returns.
But that’s just what I think.
Would you guys support a sovereign wealth fund?
Comment that down below.
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