The Question No One Asks About Social Security
By Faris Hamadeh
There are few things that have as much of an impact on our quality of life as
Social Security. Our pensions when we retire depend on it, as do many of the
benefits we associate with a modern society. At the same time, it represents one
of the largest areas of public spending. In Spain, public spending on pensions
alone will account for an average of 14.6% of GDP between 2022 and 2050. In the
United States, Social Security (which includes, among other things, public
pensions) was the single largest item in the federal budget in 2025.
We spend, quite rightly, a great deal of time talking about this system.
We debate how old we should be when we retire, how much we should contribute, or
how much pensions should increase. However, there is a much less common
question: is the Social Security fund’s assets being managed as efficiently as
possible? And from this, a few more questions arise, because if capital is to be
managed to finance obligations over decades, what should its investment horizon
be? What risks does it make sense to take? What return should we demand? And who
should make these decisions?
Perhaps the most striking case is the United States. At the end of 2025,
Social Security had assets of around $2.56 trillion. That year, it paid out
$1.6 trillion in benefits while its reserves earned an effective return of just
2.6% (under current projections, the combined reserves will be depleted in less
than a decade). These reserves are invested in bonds issued by the U.S.
government itself, an extremely conservative approach that reduces certain
financial risks, but also forgoes the diversification and return potential sought
by other institutional investors with long-term horizons.
Canada has taken a very different approach. In 1997, it created CPP Investments
– a professional and independent manager that invests the reserves of the
Canadian pension plan with a simple mandate: invest for the benefit of
contributors and beneficiaries and maximize long-term returns without taking
excessive risk. But beyond the more flexible investment mandate, the most
important thing is who makes the decisions. It is an institution that operates
independently of the government, with a professional board and a mandate
established by law. This allows it to invest like a long-term institutional
investor, diversifying across equities, credit, infrastructure, real estate,
and other assets. As of March 2026, it had generated a net annualized return of
8.8% over the previous ten years (7.8% in fiscal year 2025).
It is not difficult to make a basic comparison between the 7.8% achieved by the
Canadian plan and the 2.6% achieved by U.S. Social Security.
Presenting it this way is somewhat reductive (one could argue that the two
systems have two completely different mandates), but that is precisely the
point. U.S. Social Security – by law – can only invest in U.S. Treasury
securities, while the Canadian plan can invest across a very broad and global
range of investments, with a flexible, long-term philosophy, and independently.
The radically different mandates and governance structures of each entity are
precisely what explains the difference in financial results.
As we have seen, in Spain, gross pension spending is estimated to account for an
average of 14.6% of GDP between 2022 and 2050. However, as in the
U.S. model, we also have a very limited and extraordinarily conservative
investment mandate, focused primarily on government debt.
Obviously, changing the investment policy of a social security fund is not easy.
For a politician, there are few incentives to devote public capital to creating
a new, more flexible mandate for managing Social Security reserves. If the
investments perform well twenty years from now, they will probably receive no
credit, but if the stock market falls 20% in the first year, it will be
relatively easy to accuse them of having «gambled with» citizens’ pensions.
This is precisely why the Canadian CPP Investments model is interesting, since
responsibility for management is transferred to an independent third party.
Rethinking the operating model of Social Security is particularly important
now, given the debt crisis we are seeing in developed countries. Ultimately,
every additional euro generated is potentially a euro that will not have to
come from higher contributions or the issuance of more debt. The harder it is
for politicians to tolerate short-term volatility, the more sense it makes for
them not to directly manage a portfolio whose horizon is measured in decades.