Now, I need to offer you a warning here – it’s really for those among you who think I am some sort of liberal weenie, sent to IDE to spread a pro-commie, anti-conservative gospel.

I am going to use Ronald Reagan’s name within this text. Don’t flinch the way you do when I use the name of a current US Republican Party leader and simply stop reading so you can spew some hate my way… though I do secretly enjoy them… and pass them on to party headquarters.

Saint Ron

I am going to say something nice about the aged (now late) president with the trickle-down problem.

You see, Reagan did know a thing or two. He knew that unless the federal government took action there’d be no Social Security for baby boomers… the first wave of which are now beginning to draw Social Security benefits.

There’s a unique irony in this, too. For I doubt there has ever been a generation of retirees that could attend a family gathering and share a common bitch about Social Security payments with their parents.

But, of course, I digress.

Though Reagan did the right thing, others have not.

So, Social Security’s solvency problem has been a political kickball going on three decades now. The utter depth of the problem can be measured by how little talk there is about it by US presidential candidates.

But, fixing Social Security is relatively easy.

It involves something that is, as you’ll see, anathema to US Republicans.

It’s something Bill Clinton couldn’t do because he was basically a moderate Republican at heart – though in his personal life he was a true Democrat, since unlike Republicans in Washington his sex scandals involved women.

His hetero-proclivities aside, Clinton was pretty much pro-business, pro-global trade, anti-welfare, pro-smaller government and anti-deficit spending.

Cindy’s Cute… and Rich Too

Gosh, that sure makes him sound like John McCain… and I am sure that if given the opportunity, the 42nd president would change places with McCain for a day or two… if you know what I mean.

Of course, the current president tried to fix Social Security with a complicated plan for personal retirement accounts… his GOP brethren did us all a favor and nixed that idea… after all, how well are 401ks really working out?

And, that was really a wasted effort, because as I said, there is a simple solution to the Social Security woes… but, it’s one that would take some political courage.

So, let’s examine this solution by looking at it through the lens of recent history.

Not GAAP Accounting

First, during the past 25 years or so Social Security has piled up a huge surplus… as it was supposed to do.

But, everyone who sat in the White House during those years have proposed federal budgets that stole from the surplus in order to hide the real size of the current federal budget deficit. These slick moves allowed those presidents – and their pals in Congress that approve the budgets – to spend more and justify tax cuts for the wealthy.

The US Office of Management and Budget says that between 2002 and 2006 while the US government’s reported deficit averaged about $300 billion a year – about $4,000 per household – the real deficit was actually more than 50% larger.

The government shrunk that deficit with some chicanery by reaching under the table to borrow about $165 billion a year from the Social Security Trust Fund.

In 2007, the real deficit was $449 billion, according to the OMB. However, the “official” widely reported deficit was only $257 billion.

That’s because it’s government policy to add the borrowed Social Security Trust Fund surplus ($192 billion in 2007) to revenues before calculating the “official” deficit that has to be borrowed publicly.

And here’s a bee-ute. US leaders in Washington claim that the recently passed $160-billion economic stimulus package will only raise the 2008 official deficit to about $400 billion. Add in the annual theft from the Social Security Trust Fund and the real deficit in 2008 will be about $600 billion.

So, how did it become so easy for US elected leaders to become thieves? Other than the obvious answer, that is.

Saint Alan?

Well, as most of you know, Social Security was initially a pay-as-you-go system – annual payroll taxes of workers covered that year’s payments to retired people.

But, by the early 1980s, it was clear that the program wasn’t sustainable. More was going out than was coming in, and baby boomers were only going to exacerbate the problem.

But, Ronald Reagan, or someone who worked for him, saw the problem clearly. In 1981, Reagan appointed Alan Greenspan to design a massive overhaul of the system.

By 1983, the Greenspan/Reagan plan turned Social Security into a national pension plan. The plan increased Social Security payroll taxes, which in turn created a huge surplus that would fully cover the future costs of baby-boomer retirements.

As it did then, that payroll tax now takes 12.4% of a worker’s salary and pays it directly into the trust fund. Half is paid by employers, unless you are self-employed like me, then you pay the full 12.4%… and don’t even get me going about my $1,750 a month health insurance bill, either.

The Five Percent Problem

But, the Social Security tax is capped. It only applies to the first $102,000 of annual income. About 85% of all US workers make that amount or below.

The top 15%, people with income beyond $102,000, are not taxed (for Social Security) after that level or earnings.
Of course, Greenspan and Reagan set that $102,000 cap back in the 1983. That’s because it was their plan to tax 90% of all income earned in the US.

But, people make much higher salaries today than they did 25 years ago, so the income distribution plan’s maximum top – the $102,000 cap – now includes only the bottom 85% of US earners.

Now, let’s not lose sight of this vital point.

The Next BOOM You Hear

Because, baby boomers, and all others who have worked since 1983, paid in way, way, more than is needed for their Social Security retirement payments. They saved and created the trust fund surplus, which now, on paper anyway, amounts to more than $2,000 billion… and all that is supposed to be invested in US Treasury bonds.

And, that number is projected to reach nearly $3,000 billion in 10 years. Then Social Security will stop generating a surplus – and stop subsidizing the rest of the budget – and will begin redeeming its bonds to help make payments.

Current projections show that the trust fund bonds will be exhausted by about 2041.

So, if you’re a baby boomer, you have to admit that this not only bites for you but it totally bites for your kids, too.

Because, not only did we have to bail out our parents, but now it looks as if we’ll need to bail out our kids, too.

Because, many of us are today’s top earners.

It’s This Simple

And, we can restore the trust fund’s full sustainability though the year 2085 with a minor adjustment to the Social Security tax scheme. We need to demand that the federal government restore the income cap to the Greenspan/Reagan level of 90% of all US wages.

Yikes, raise taxes… Yep! Sorta… on huge salaries… like congressmen, presidents, governors and senators, other professional actors, pro athletes and top lawyers.

To let things go the way they are now is criminal, because politicians won’t admit that they raped Social Security.

That means their solution will be to cut pension benefits and raise the eligibility (retirement) age.

And I am serious, this stinks for baby boomers.

Crappy Choices Come Back To Haunt Us

We’re the good guys. Most of our lives, on federal Election Days, we ended up with the choice between crap or double crap… but we voted faithfully.

Then, our crappy, two-bit politicians made the national argument about moronically trivial stuff in order to hide their thievery and avoid any real discussions about their obligation to your federal pension plan.

And, now, it’s up to us to show our kids – and future generation – that we are not self-centered and self-absorbed, unlike the beg-for-votes crowd.

That somehow, we can make right what Washington has made so wrong. Because, thanks to the father of the conservative movement, Ronald Reagan, Social Security is not a federal entitlement – it’s a federal pension obligation.

Have a great weekend… keep the faith and…

Lock and load.

Andy

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.