Is It Time for the U.S. to Create a Sovereign Wealth Fund?

As the U.S. government looks for a cure-all amid the financial crisis, some experts are looking to a government-owned wealth fund as an answer.

The unprecedented economic fallout caused by the COVID-19 pandemic has government officials scrambling for a solution, and some say a U.S. sovereign wealth fund could be the answer.

Sovereign wealth funds are government-owned investment funds. Such funds invest in central bank reserves, state-owned resources and proceeds, and currency operations to benefit the country’s economy. Numerous countries, along with some U.S. states, including Alaska and New Mexico, have created such funds. Brian Martucci, a finance editor at Money Crashers, a personal finance resource, explains that these funds are common in well-resourced nations with strong balance sheets and state economic control, such as in the Arabian Peninsula, Norway, Japan, Australia and China.

“The best-known sovereign wealth funds are state-run investment enterprises funded through balance-of-payments surpluses, natural resource exports, proceeds from state-owned enterprises and other income sources available to central governments,” Martucci says.

Sovereign wealth funds act similarly to diversified mutual funds, yet take on significantly more risk, says Matthew Hurst, an associate professor of finance at Stetson University and director of the Roland George Investments Program. “The fund’s objective is primarily to deliver absolute return by investing in assets such as international stocks, bonds, hedge funds and private equity,” he notes. “The largest sovereign wealth funds are from countries that are rich in natural resources but are largely undiversified.” Instead, these serve as “stabilization funds,” so the economy is less dependent on a single resource. Returns on the fund are usually in the form of a dividend, or given back in the form of various incentives, he adds.

As American workers face increased wealth inequalities caused by the pandemic’s economic downturn, some experts suggest the time for the U.S. to build a sovereign wealth fund has come. In an interview with think tank Berggruen Institute, Joseph Stiglitz, a Nobel laureate and professor at Columbia University, said creating such a fund would aid American workers as well as businesses. He said now is a good time to discuss the creation of a sovereign wealth fund because of the “massive assistance” going to many companies where the government is providing liquidity.

“As taxpayers, we bear the downside risk. If the businesses don’t pay back, we bear the losses,” Stiglitz told the Institute. “If that is so, we all must also benefit from the potential upside when companies are profitable again. A sovereign wealth fund that holds those equity shares in a trust for all citizens would end up owning significant parts of the economy.”

This help could extend to retirement, as countries with sovereign wealth funds are likely to incorporate pension reserve funds.

Japan’s Government Pension Investment Fund (GPIF), which, last year, became the world’s largest sovereign wealth fund, works as the pension fund for Japanese public sector employees. The pension investment fund invests reserve funds of government pension plans, and diversifies funds by asset class, region and time frame. While the coronavirus has pummeled pension plans globally, implementing a sovereign wealth fund can create a sense of financial stability among workers while increasing wealth equality, advocates say. “All eligible citizens can benefit from a dividend or annual annuity, and therefore this helps with wealth equality,” Hurst says.

And investing in a diversified portfolio of industries rather than natural resources can help increase economic equality in the country, argues a report by the World Economic Forum. Tax reform would increase revenues that can then be reinvested into the economy, writes Cody Feldman, a program specialist on the international political economy at the Forum. Additionally, the report states, incorporating a sovereign wealth fund may urge workers to independently invest in stocks, another component that can drive wealth for the individual and economy.

The Alaska Permanent Fund (APF) sets itself apart from other sovereign wealth funds in that it pays annual cash dividends to the citizens of Alaska through an investment portfolio that invests in oil revenues. This year, the APF paid its citizens roughly $1,000. Norway’s sovereign wealth fund, the second largest after Japan, owns oil and gas holdings in companies such as BP, Shell and France’s Total.

In his interview with the Berggruen Institute, Stiglitz touched on how, if the U.S. implemented a sovereign wealth fund, incorporating oil revenues could result in paid dividends for American workers. “It would reduce the burden that would be put on taxation, on redistribution, while augmenting people’s assets,” Stiglitz said. “People would feel like they have an ownership stake in that system. That, in turn, would create more stability.”