Thursday, October 23, 2014

Political Risk that Threatens Retirees Social Security

It is campaign season and the airways are full of political commercials.  Fortunately for the politicians truth-in-advertising laws do not apply to campaign ads.  If political ad were held to the same standard as commercial ads, they would be scarce on television.

A recent television spot by the Democratic Congressional Campaign Committee supporting Arizona Congressman Ron Barber in his campaign against challenger Martha McSally is not only guilty of the typical distortion of an opponent but goes a step further by implying that Social Security is a retirement savings program.

In the ad a middle aged woman accuses McSally of trying to destroy Social Security by privatizing it.

In addition to taking a response by McSally to a reporter's question out of context, it goes on to say:

We worked hard. Played by the rules.  But then you have Martha McSally who wanted to risk ALL THE SAVINGS [emphasis mine] we earned over a lifetime.

Ad's Wording is Deceptive

This wording is very deceptive but it is also a deception that Social Security's supporters have been promoting to the American public since the Social Security legislation was passed in 1935.  While its supporters have always talked in public about Social Security as if it was a pension type retirement plan, the reality is that it has always been nothing more than a just another income transfer program. 

The lady in the Democratic Congressional Campaign Committee uses the words risk all the savings which implies that the Social Security taxes paid by workers and their employers are a form of retirement savings.  However, Social Security  payments to retirees are not like payments from a pension fund or a 401(k) or other type of retirement savings accounts. 

First, those who pay into and eventually  qualify to receive Social Security payments when they retire have no legally protected contractual right to Social Security benefits.  This is in contrast to the other sources of retirement income listed above in which participants have a contractual or ownership right to income from these plans.

In two separate cases (Helvering vs Davis in 1937 and Flemming vs Nesor in 1960) the U.S. Supreme Court  ruled in the first case that Social Security is NOT a retirement savings or pension plan but, instead, a simple welfare plan where one group (workers and their employers) are taxed to raise funds to give to another group (retired workers).  In the second case it ruled that people who pay Social Security taxes have no contractual right to the money taken from them by the tax or to any income generated by that money.

Secondly, the reference to savings in the campaign ad is deceptive since the money taken from workers' paychecks by the Social Security tax is not put into an account for each worker.  There are no savings to lose for the simple reason that the money taken from current workers and their employers is immediately transferred as payments to current retirees. 

When a worker retires, the Social Security payments that person receives comes from taxes on those still working and NOT from funds collected and stored in an account during that worker's working years.

Social Security Law Can be Repealed by a Simple Vote of Congress
Social Security is a law like any other law and, as such, can be changed or repealed by a simple majority vote by Congress.  Further, since the Social Security program, like any other program that requires the spending of money, relies on Congress to authorize funds for it to spend, payments can be stopped without actually repealing the law. 

A simple majority in the House of Representatives  voting NOT to approve it funding would halt Social Security payments to retirees for that year - however, existing workers would still have the Social Security tax deducted from their paychecks every payday.

What keeps Social Security from being repealed or not funded is the fact that millions of retirees depend upon Social Security for much of their retirement income.  Not only do these retirees vote but their voting age children and grandchildren also vote and these younger voters don't want to see their retired parents and grandparents thrown out into the streets.

Demographic Change Could Result in Repeal of Social Security

However, as I described in my article Social Security's Achilles Heel, I point out that the introduction of IRA and 401(k) accounts in the latter part of the 20th Century has made many retirees less dependent upon Social Security for retirement income. 

While these retirees probably won't advocate ending Social Security many of them won't be motivated to actively oppose repeal.  Meanwhile many younger workers who are struggling financially and want relief from Social Security taxes and whose parents or grandparents are not financially dependent upon Social Security will actively support repeal. 

Politicians, like other people, want to keep their jobs and, once a majority of voters want to have Social Security repealed, politicians will change their stand and vote to repeal.  This is the political risk that Social Security faces and this risk may come to the forefront sooner rather than later.

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