Uncle Sam is Enron

Guess what folks. Remember all that extra money Social Security was collecting, well they aren't anymore. This year they have to pay out $29 billion more in benefits than they collected in taxes. That means breaking into the office in West Virginia that holds 2.5 trillion in government bonds (really IOUs).

Think about that for a minute. If your private company decided that it was going to spend all of the money it made, plus it's reserve fund, then repay the reserve fund with IOU's, from itself, it would be called Enron. When the IOU's came due and the accounts were all broke, Congress would be holding investigations and the CEO and CFO would go on trial. When Congress does it this is called "safe investing".

Did you know that your company can't legally require you to put any of your retirement into company stock? Yet the government gives you no choice but invest your social security payroll tax in their bonds.

If you wonder why the deficit is going up so fast, keep in mind that for the last 30 years we've been counting the Social Security surplus twice. We count it the first time and claim it's a surplus, then spend it (replacing the money with T-Bills). Then we count that money again as part of the general budget to show lower deficits than we truly have.

Bill Clinton never had a balanced budget, the closest he ever came was really about $330 billion in deficit spending, then raided the Social Security surplus to tell us it was balanced. Every President since Social Security started has done the same thing.

So how do we fix the Social Security problem? First, we'll have to raise the payroll tax, either on everyone paying it, or extend the limit on the amount that's taxable; or cut benefits (good luck with that).

Then the surplus needs to actually be put somewhere that the government isn't paying itself for the use of the money. Either corporate bonds, or another government's debt would be the safest place to do it. Then when the IOU's are do, Uncle Sam isn't trying to pay you with money he has to borrow. Instead he's paying you with money coming from a different source.

Congressfolks have demonized the idea of investing Social Security's money anywhere but in the same government that's supposed to pay the benefits; but at the same time have made it illegal for private business to do the same thing. If business isn't allowed to do it, there is probably a reason, one that government should probably think about in terms of itself.

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At Least He's Honest, About Taxes

Barack Obama has to be given credit for being honest about raising taxes, since he makes no bones about it.

In Wisconsin this week he brought up his idea to put a "hole" in the Social Security payroll tax, and keep the 102,000 limit, then kick it back in at $250k. I don't totally disagree with this idea, IF the formula for payments is kept the same, and there is some kind of cap on what income level you quit paying the tax at.

Currently the more you pay in, the more you get back. If with his new plan he wants to hoist a huge tax hike on a bunch of people, then "means test" it and not give them more in benefits for paying more in taxes, he should means test the whole Social Security program. He should require that any retirement income, pensions, 401 investments, etc, be counted against what anyone gets from Social Security.

On a historic note, he might want to look back to the 1980's and see what happened to Congressmen who suggested such an idea for Medicare.

He also took shots at John McCain over wanting private accounts for Social Security, claiming the stock market is too volatile for such investment. Then why does the government basically force it's employees to pick from stock plans with their retirement funds? Why don't they ban unions from investing in anything but T-Bills with their pension funds? Because the stock market is where those pension funds get their biggest returns.

Here's why politicians, like Obama, don't like the idea of you controlling any of your Social Security money. If you control it, they can't spend it. Right now that's exactly what they do. If you took McCain's plan, and put a quarter of your Payroll Tax into the market, that would be a huge; like hundreds of billions a year huge; chunk of money congress couldn't fritter away.

As far as his "safety" concerns, if the good Senator could show me a 10, 20, 30 or 40 year period where the special government bonds (actually, IOU's) the Social Security surplus is invested have outperformed the market, I'll gladly concede to his idea. He knows he can't, because it's never happened.

Keep in mind the next time Barack Obama tells you John McCain is for the "status quo" that his ideas for social security are exactly the status quo. It's just keeping the money as a piggy bank for Congress.

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Tax Hike Coming?

Neil Cavuto and Michael Reagan had an interesting discussion yesterday on Fox News about the possibility of Bush agreeing to a tax increase on Social Security this year.

As opposed to an across the board increase, though, what is supposedly being floated by the House leadership is raising the maximum wage that social security taxes are paid on. Currently that amount is $97,500, and does move up slightly every year.

What wasn't clear was whether or not that would also bring an increase to the upper wage groups maximum benefit, as it has whenever the wage ceiling was raised before. That amount is $2116 per month right now.

I'm not sure Bush would actually go along with the idea, he wouldn't be the first President to raise taxes when he's safely away from worrying about re-election. In fact both Reagan and Clinton raised them in their second terms.

If he is thinking of this, as Cavuto suggests, then the ONLY way it should happen is if the extra money collected is used to test the idea of investment of a portion of the trust fund.

I would suggest that if he's going to do this, raise the maximum taxable income to $22,500 above the current ceiling; making $120,000 the new threshhold. However, all taxes collected from that group be invested in the Thrift Savings Plan's (TSP) most conservative non-treasury option, the F Fund, which is a bond fund with a good historical earning (5.9% in the last 5 years).

Why pick a TSP fund? Well two reasons, the government already runs it, so it wouldn't incur a huge amount of extra beaurocrats to start the experiment. Secondly, if Democrats balk about it being too risky one could ask them why it's trusted with all the federal employee's retirement benefits.

If the amount was too much for just the "F" Fund, then a portion could be moved to other funds, except the G Fund, which is a fund of government issued bonds. The problem with the current Social Security ponzi scheme is that excess money is already tied up in government bonds. In other words the government shouldn't be buying bonds from itself, since then it has to repay them, with interest.

The term of the tax hike, like the current tax cuts, should be limited to 5 years, and then require reauthorization with full debate. Why? Because after five years, when it's seen that the invested portion of Social Security is actually making money, instead of incurring debt, and that the interest earned is moving the solvency date out from the current 2042, it will be hard to stop the idea of investing other excess Social Security funds.

Using the 5 year average of the F Fund (5.9%), if the government put $1 billion of that new tax into the fund this year, and added $1 billion per year until 2042 (when SS starts running deficits), they would have accrued over $127 billion, 92 billion of it in earnings. ( I used American Century Investments Time Value calculator to come up with the numbers)

Any deal that doesn't include investing at least a majority portion of the extra taxes raised should be ignored by the President.

Technorati Tags: Social Security, Bush, Congress, Taxes, Investments

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