Debt Digest | Hard Pass on a US Sovereign Wealth Fund

Links & Fiscal Facts

Here are this week’s reading links and fiscal facts:

• Will Republicans overcome reelection fears and cut spending? Dominik Lett and I wrote in our recent paper: “[A]sking politicians running for office to reform entitlement programs is like asking astronauts in space to shut off their oxygen. Most politicians’ desire to be reelected is stronger than their willingness to make the tough choices needed to achieve fiscal balance.” Is this time different? Politico’s Rachael Bade reports: “I’ve spoken to many conservatives who argue that the House is basically gone in 2026 given their tiny majority. That means now is the time, these types argue, to blow through their political capital and attack the federal deficit, political blowback be damned.” If Republicans overcome political obstacles and cut spending, the economic benefits could be substantial. As Dominik Lett and I’ve covered, stabilizing federal debt could increase the average American’s income by $513 by 2030 and by $5,500 at the end of 2054. Historical evidence from Canada, as Cato’s Chris Edwards notes, shows that spending cuts can drive growth. “Canada’s cuts were coincident with the beginning of a 15-year boom that ended only when the United States dragged Canada into recession in 2009.” Republicans have ample spending cut options— Chris Edwards and Adam Michel identify $4.8 trillion in savings over 10 years.

  

• Hard pass on a US sovereign wealth fund. President Trump signed an executive order on Monday calling for the creation of a US sovereign wealth fund (SWF). I’ve issued the following statement on this decision: “A U.S. sovereign wealth fund (SWF) is not a good idea. Unlike countries with successful SWFs—such as Norway or Singapore—the U.S. government runs persistent budget deficits and has no surplus revenue to invest. Even if the fund’s returns exceeded the government’s borrowing costs, this wouldn’t generate new wealth for society; it would simply transfer economic activity from the private sector to the government. Worse, a government-controlled investment fund risks political interference in capital allocation and could bring the U.S. economy closer to a form of state ownership—something Americans should resist.” Kevin Stocklin from the Epoch Times quoted me on the topic: “Political considerations often override sound financial management, and a U.S. sovereign wealth fund would almost certainly become politicized [...]. Imagine the federal government becoming the largest shareholder in American companies—this would invite even more lobbying, rent-seeking, and government interference in corporate governance.” In addition, there is no legal basis for a US SWF without congressional authorization. Kurt Couchman from Americans for Prosperity points out that 31 U.S.C. § 3302 mandates government funds to be deposited into the Treasury, prohibiting their use for other purposes, including lending the money, using or exchanging the money for other amounts (i.e. buying stocks).

• The federal government wasted more on improper payments in 2024 than it spent on Homeland Security. According to Rachel Greszler, a visiting fellow at the Economic Policy Innovation Center, the federal government made at least $162 billion in improper payments in 2024. This means the government “spent” more on improper payments than on Homeland Security and close to the budget of the US Army (see figure below). Greszler notes that only 5% ($8 billion) of total improper payments were underpayments. She further highlights that over the past decade, improper payments have totaled $1.9 trillion, amounting to $14,000 per household. To address this issue and reduce waste, Greszler recommends measures like “enhancing secure data sharing, tightening eligibility verification, creating and empowering a Fraud Czar or Taxpayer Integrity Office, holding agencies accountable, and ensuring effective oversight.”

  

• Congress shouldn’t use general revenues to shore up Social Security. Urban-Brookings Tax Policy Center’s William Gale and Samuel Thorpe suggest: “Revenues that would otherwise go to making the provisions of TCJA permanent could be used instead to make Social Security solvent for at least the next 75 years.” However, this shift would fundamentally alter Social Security’s self-funding structure, redirecting trillions from the general fund to pay for program benefits. As Charles Blahous, a former public trustee for Social Security and Medicare, warns: “The provision of substantial general revenue to Social Security commits the federal budget—and the income tax payers standing behind it—to supporting rising benefit costs for a longer period of time. The effect of the transfers also postpone the program’s projected insolvency date, diminish the apparent urgency of legislative action, postpone needed reforms, cause more beneficiaries to be on the rolls by the time a legislative solution is finally negotiated, and constrain the policy options available to maintain self-financing.” Instead of transferring general revenues, Congress should slow benefit growth, thus reducing the burden of Social Security’s spending on current and future taxpayers. Forward-looking reforms could include price-indexing initial benefits and reducing cost-of-living adjustments. As for the TCJA, Congress should pair tax cut extensions and expansions with commensurate spending cuts and offsetting revenues from closing tax loopholes to avoid worsening the already severe deficit and debt.

• Congressional loopholes are killing fiscal discipline. According to the Office of Management and Budget, $223 billion was exempted from statutory spending limits for fiscal year (FY) 2024—akin to exempting the entire Department of Education’s annual budget from spending controls. Worse, after FY 2025, spending caps will expire altogether, opening the floodgates for even more discretionary spending. Without strong limits on discretionary spending, fiscal discipline will erode, and deficits will widen. Congress should restore, extend, and strengthen spending caps, eliminating loopholes that allow for runaway appropriations.