Social Security and the Politics of Deceit

Member Group : Lincoln Institute

In the Vice Presidential debate, Paul Ryan stated "Medicare and social security are going bankrupt". Without hesitation Joe Biden said emphatically "in regard to social security, we will not privatize it,…imagine where all those seniors would be if the money had been in the market"

Joe Biden’s simplistic remark belies a horrific lack of understanding by most people of the intricacies of the realities of investing versus the broken promises of Social Security. The erroneous comment by Biden about the market and his disingenuous explanation of what life would have been like had you been able to make your own decisions with social security funds underscores the problems our nation faces in understanding the results of the 2012 Presidential election.

In this election particularly, the politics of deceit continued unchecked when Biden’s statement on social security went unchallenged.

Biden’s comments are wrong for the following reasons.

First, the social security system is a system which has benefits tied to contributions. The law is called is called the Federal Insurance Contributions Act which is the title given to the provisions of the Social Security Act of 1935 to allow for the contributions to be collected by the IRS.
Any pension system has many critical elements two of which in social security’s case are life expectancy and the expected earnings rate.

At the time the Social Security Act of 1935 was passed, the average life expectancy in the United States was under 63 years old! In 2012, the average life expectancy has reached over 78 years old.

Concurrently, the real expected earnings rate of most pension plans in the United States is less than 6% whereas the average public sector fund averages 8%.

With both lower earnings and longer lives, the net result is that public sector pension funds and social security are severely underfunded and will eventually be declared insolvent.

This underfunding is precisely where the deceit starts. If politicians can pay you social security today using another’s contributions, he gets your vote. By the time you realize what happened to your pension and social security the politician has retired. The next politician then tells you how they will fix the problem created by the other politician. In business, we call this a Ponzi Scheme.

Even Biden concurred that in the Obama plan social security and medicare are severely underfunded by 2024 yet Biden was critical of the Ryan plan because Ryan said it is insolvent by 2016.

In either case, social security and medicare are insolvent! All Biden was arguing about was when not if!

Obama and Biden’s plan of deceit only required that they get you through the election before you realize what happened. They succeeded.

The report on Social Security for 2011 on pages 35-38 of the report even concludes "Social Security’s financing is not projected to be sustainable over the long term with the tax rates and benefit levels scheduled in current law" (page 36)

Second, most social security "investments" are in U. S. Government securities which under the Federal Reserve’s Quantitative Easing programs (Q.E. 1 through 3 and Operation Twist) makes it virtually impossible for the Trustees of the Social Security funds to earn even over 1% on the funds versus the 8% needed.
The lack of earnings will also shorten the life of the social security funds that remain making insolvency of the system more likely.

Third, to further stimulate the economy, the President and Congress decided to reduce funding from employees for social security by 2% of the contribution (almost 30% of the tax) for years 2011 and 2012. This stimulus effort, while perhaps well intentioned, only hastened the day of reckoning for the bankruptcy of social security.

The real solution to social security funding will become more unpalatable each day a long term solution is delayed.

The longer we wait to fix Social Security the worse the problem will become.
Effective solutions to social security funding include allowing Americans the opportunity to invest their own funds and to be responsible for the results of those investments. If people knew the reality of the social security funds, I suspect that they would rather have the chance to learn, invest and prosper rather than permit government to invest for us at absurd rates knowing all along that the money will not be there.

Additionally, a realistic program of educating citizens on the value of preparing for later years is crucial to long term solutions. The government has proved that it cannot effectively manage your money. Government will only use funds they have to buy votes.

Retirement ages in light of longer lives must also be realistically considered. The longer politicians lie about what social security can and cannot do, the more severe the solution will be on the youngest of Americans.
Finally, if Biden really believes his own story, I would encourage him to turn in his retirement program and go under the same social security system that we are all under.

Col. Frank Ryan, CPA, USMCR (Ret) and served in Iraq and briefly in Afghanistan and specializes in corporate restructuring and lectures on ethics for the state CPA societies. He has served on numerous boards of publicly traded and non-profit organizations. He can be reached at [email protected] and twitter at @fryan1951.