Dear President Obama:
Congratulations, Mr. President, on your successful reelection. As the post-election sell-off in the market reminded us, though, the substantial financial problems facing our country are far from over. High among those that need to be addressed early in your second term is the future of Social Security.
Within about the next 20 years -- maybe even sooner -- Social Security's Trust Fund is expected to run dry, which will compel the government to slash benefits by about a quarter.
Thanks to your temporary payroll tax cut, scheduled to expire at the end of this year, you have a one-time-in-history opportunity to shore up the program. With a simple move around that expiration, you can:
Dramatically soften the blow from when the Trust Fund runs dry
Strengthen the program for generations
Encourage investments in America
Showcase your ability to work across the political aisle for the good of the country.
While my colleague Dan Caplinger may have a slightly different perspective on how you should proceed -- he thinks you should extend the payroll tax holiday (you can read his advice here) -- I propose an entirely different approach that I believe will win strong across-the-aisle support without busting the budget any further.
Higher Taxes Even Republicans Could Support
Mr. President, to achieve this incredible legacy, all you would need to do is make two simple adjustments when the temporary payroll tax cut expires.
First, as part of the payroll tax cut, money has been transferred from the General Fund to the Social Security fund to make up the lost revenue. Keep that transfer going -- it will keep the fund from emptying any faster than it is already on track to do.
Second, use the money from the restored payroll taxes to set up something similar to the Federal Thrift Savings Plan for everyone who pays into Social Security. That government program has a track record of successfully enabling U.S. government employees to retire comfortably -- some even as millionaires -- and it can work similar wonders for the rest of the country, as well.
You can jump-start this plan with the money from the restored 2% payroll tax -- and make it clear that it is the path that will help people prepare for the pending collapse of the Social Security Trust Fund.
By structuring things this way, you get:
A program that's no worse to the deficit or Social Security's future than the 2012 situation
Taxes that are no higher than they're already scheduled to be in 2013
An opportunity to let every American invest in America
A strong buffer for retirees versus what they'd have without this fix when the Trust Fund empties.
What This Would Mean to Typical Hardworking Americans
With the average household income around $50,000 per year, this plan would put $1,000 annually toward a typical family's account each year. Assuming the country's median age of about 37 and a Social Security retirement age of 67 , that typical person has around 30 years of compounding before reaching full retirement age.
Since its inception in 1988, the Thrift Savings Plan's C Fund -- a fund that tracks the S&P 500 index (^GSPC) of American stocks -- has returned 9.23% annually. The Thrift Savings Plan's F Fund -- a fund that tracks a broad index of American traded bonds -- has returned 7.12% annually since its 1988 inception.
In a nutshell, $1,000 a year invested in those funds for 30 years at those historically realized rates would grow to somewhere between $96,525 in the F Fund and $142,294 in the C Fund. That's real money to the average American household. In fact, it's enough to cover somewhere between $3,861 and $5,692 of the retirement income shortfall they'd otherwise see after the Trust Fund evaporates, based on the 4% rule for retirement withdrawals.
Of course, there are no guarantees in investing, but even lousy investing beats not investing at all. And it certainly beats the 25% haircut in Social Security benefits with nothing to buffer it that will be our fate if we simply let the program run its course, unchanged.
Mr. President, you have a one-time-in-history opportunity to shore up what has been called the most successful American government program of all time. By working with Congress to pass these simple changes to the program, you can secure your place in history as the man who saved future generations of American retirees from an otherwise ugly fate.
Motley Fool contributor Chuck Saletta welcomes your comments. For The Motley Fool's latest research on Social Security, Medicare and your retirement, click here for a free video report.