Social Security and the Politics of Deceit

In the vice presidential debate, Paul Ryan stated that "Medicare and Social Security are going bankrupt."  Without hesitation, Joe Biden responded emphatically that "in regard to Social Security, we will not privatize it[.] ... [I]magine 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 regarding the reality 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, Social Security is a system which has benefits tied to contributions.  The law 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.  In 2012, the average life expectancy has reached over 78.

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 a politician 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 to Social Security, the politician has retired.   The next politician then tells you how he 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 will be severely underfunded by 2024, yet Biden was critical of the Ryan plan because Ryan said that these programs will be insolvent by 2016.   

In either case, Social Security and Medicare are insolvent!  All Biden was arguing about was when, not if!

Obama's and Biden's plan of deceit required only 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 that "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 the years 2011 and 2012.  This stimulus effort, while perhaps well-intentioned, only hastens 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 prefer 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 use funds it has only 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.) served in Iraq and briefly in Afghanistan.  He specializes in corporate restructuring and lectures on ethics for the state CPA societies, and he has served on numerous boards of publicly traded and non-profit organizations.  He can be reached at FRYAN1951@aol.com and twitter at @fryan1951.

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