When It Comes To Social Security, Are Politicians Really That Ignorant?

I got a kick out of an Associated Press article today that described the latest political sniping about the Social Security system. It makes me wonder, listening to the positions and statements of our political class, if our current politicians could really be that ignorant about the system and its finances? If they are, then the chance of ever fixing this failing system is nothing more than random since those in charge do not understand the root causes of the current problem.

Consider some direct statements from the article:

• Obama contended in the article that Republicans would tie Social Security "benefits to the whims of Wall Street traders and the ups and downs of the stock market." But we have already proven in this blog that this would be a good thing. Without going into great detail, I proved in the July 13, 2010 post that if I had been allowed to keep all of my Social Security contributions in a tax free account, that invested only in an S&P 500 index stock mutual fund, rather than handing it over to the government, my monthly retirement check from the fund would have been twice what the Social Security Administration tells me I am going to get from them. Of course, my S&P investment would run dry once I hit 102 years old but that is the risk I would have been willing to take.
• Another Obama quote stated that "we have an obligation to keep that promise, to safeguard Social Security for our seniors, people with disabilities and all Americans - today, tomorrow and forever." Now, what he does not say is how he proposes to do that. It is nothing more than rhetoric. Rather than confronting a major funding problem, he just spins out nice sounding sound bites. He cannot safeguard anything without a plan, something he does not appear to have. One reason for that is he either does not understand reality or he does not have the courage to face the reality: the system is broken and will not safeguard anything unless solid quantitative analysis is done and some financial pain inflicted in order to save the system.
• "Many Democrats adamantly oppose any cut in benefits to reduce costs." Let's see how ignorant this statement is. The Social Security system is now hemorrhaging money, i.e. in 2010 it is likely to take in less money in Social Security taxes than it pays out in benefits. Given the dire straits, shouldn't somebody consider cutting payouts for the very rich? Given the great wealth of Bill Gates, Warren Buffet, Bill and Hilary Clinton, Senator John Kerry, etc., why would we not ask that these people forego their Social Security checks for the good of the country? Would it not be better to direct limited funding to those that most need it to survive rather than pay it to multi-millionaires and billionaires where it would be a fly speck on their balance sheets? Granted, they paid into the system expecting to get some return. However, given how poorly the government has run the system, if the trade off is cutting benefits for the wealthy in order to save the system for the poor, is the above quote and position really something the Democrats want to defend?
• "Some [Democrats] will not accept a gradual increase in the retirement age." Another position in conflict with reality. When the Social Security System was out in place in the 1930s, Americans lived much shorter lives than they do today. That is what allowed the system to work for so long. People died off before they reaped too much reward and there were enough younger workers to pay the freight for those seniors that lived longer than average. The reality today is a two fold bomb: people are living longer and the base of younger workers to support the system is shrinking. That is reality and it is driving the coming insolvency of the system. To flatly state they do not want to raise the retirement age is just ignorance of reality. The retirement age needs to be raised with provisions for allowing someone to draw early benefits based on financial need. Again, do the Democrats really want to the system to crash because people who do not need the money draw it, endangering payments to the truly needy?
• The Republicans are no better, saying "an increase in Social Security taxes is out of the question, even for the wealthy." Although I am never an advocate for increasing taxes since the political class almost always squanders it away, the current taxation method of Social Security is the most oppressive form of tax in the country. In 2010, Social Security taxes the first $106,800 in wages at 6.2%, which translates into $6,621. Now consider two Americans. The first one makes $106,800 in wages and the second earns ten times that much or $1,068,000. They would both pay $6,621 in Social Security taxes even though one earned ten times as much. Consider a third person who earned $10,680,000, or a hundred times as much as the person earning $106,800. Guess what: they both would pay $6,621 in taxes. Hardly seems fair but that is the way it is. This tax structure is a leftover from the original planning where most people did not earn more than the maximum amount taxed. Thus, the wealthy in this country could not really complain if they no longer were able to receive a Social Security check, they have been getting a huge tax break under the current system for decades.
• "Social Security's combined retirement and disability trust funds are expected to run out of money in 2037." This is the biggest fallacy of all. Over the past decades, as we have all been paying into Social Security, once the Social Security Administration paid out is current obligations, any excess money was sent over to the Treasury where it was usually wasted by the politicians. In exchange for receiving the excess Social Security money, the Treasury Department basically gave the Social Security Administration an IOU for the funds. If you add up these IOUs, they will cover the Social Security expenses up until 2037. But this is only an accounting trick, nobody has taken the money you were forced to pay in Social Security taxes and put that in a little bank account for you to draw down when you retire. That money has been spent by Congress long ago. Those IOUs are what is called "unfunded liabilities." In other words, The Treasury knows it owes the money but does not have the assets to back them up. Thus, in order to pay for those IOUs, the Treasury Department needs to either 1) issue more debt, further expanding the obscene level of our national debt or 2) raise taxes. to pay for the IOUs. therefore, Social Security does not run out of cash in 2037, it is already in a negative cash flow position.

Thus, as with all issues, American politicians are just being politicians. They do not want to do any long term planning since it might upset some voters short term and endanger their real agenda: getting elected over and over and staying elected. In the meantime, issues like Social Security continue careening out of control and shortly, out of money. It is obvious from the AP article and Obama's comments, that he does not have a grasp of reality and a plan to fix the root causes of the Social Security system's problems. Other wise, I am assuming ti would have put them forth. The article says as much with the quote: regarding fixing the system, "he proposed no ideas for doing that."

The other issue that no one wants to discuss is freedom. By controlling our retirement plans, we lose some freedom and politicians gain a continual election sound bite opportunity. Americans should have a choice of where and how they save for retirement, it is called personal responsibility and freedom of choice. From our July 13, 2010 post, we know that we would likely be better off financially if we had been allowed to control our retirement fate and wealth. But that would diminish the power of politicians over our lives, something they find unacceptable.

However, the more immediate need, rather than the long term debate of whether Americans should be able to keep their retirement fate in their own hands, is how to fix the currently broken system. "Love My Country, Loathe My Government" proposes three simple fixes that are in tune with reality and would save the system for those Americans that really need the retirement support:

• Step 10 would basically change the Social Security tax structure so that multi millionaires would pay a fairer share of taxes, i.e. this step would eliminate the situations discussed above where someone making $10 million a year pays about the same amount in Social Security taxes as someone making just over $100,000 a year.
• Step 11 would not allow Social Security to pay out their limited funds to the very rich in this country, saving these limited funds for those that really need the help in retirement.
• Step 12 would start raising the retirement age over time, with provisions for someone to apply for early benefits based on dire financial needs.

It is about time that we dealt with Social Security's reality. Otherwise, ignorance will continue to prevail and no one will have a happy retirement, regardless of who is in office and regardless of how ignorant they are.

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http://www.cato.org/
http://www.reason.com/
http://www.robertringer.com/
http://www.realpolichick.blogspot.com/
http://www.flipcongress2010.com/