How to Corrupt the Government Insurance Programs

Tony E Hansen

12 August 2012

With the addition of Paul Ryan to the GOP Presidential ticket, we now have a clear choice between visions of the two major candidates.  We can see a clear divergence of political philosophies that could shape the future of our country, just in the way that New Deal policies have shaped the past half century.  While cost structures for Social Security (SSA) and Medicare (HMS) could use some attention, we have to seriously consider the possible consequences to Mr. Ryan’s proposal for overhaul of those programs.

According to his proposals in Congress, Mr. Ryan wants the private sector to take over SSA and HMS. In his theory, this will save the Federal government the costs of handling these programs and leave more money for the HMS and SSA beneficiaries (otherwise known as the American people). 

We have to remember that SSA, HMS, and workforce benefits were set up to combat poverty, especially for the elderly. They were set up exclusively for the elderly to keep private companies in business for the rest of the population.  As well, people are not prohibited from using other retirement savings. SSA and HMS programs, however, are designed to be stable and conservative investments to keep the funds at or above inflation with the idea that no one should be using the money on risky investment schemes that could ultimately rob Americans of their elderly livelihood. The people that manage SSA and HMS are not allowed to defraud the beneficiaries or use their money for risky schemes, hedge funds, or the like. Also, people are given a single entity from which to claim benefits, and there is little-to-no confusion as to the rules since they are equal across all plans and beneficiaries.  This is meant to promote faith in the funds being there for the beneficiaries when they retire. 

A side benefit (whether a good thing or not) of the SSA and HMS funds is that the federal government can borrow against its own funds rather than from foreign entities (see the Clinton years). Consider how this is similar to where people today can borrow against their Roth or 401K retirement accounts where they are essentially loaning to themselves from money they have in bank. There are rules to this, but essentially, these same people could instead borrow from a loan shark and pay relatively high interest rates to someone that is not even a friend. By borrowing against your own savings, you are repaying your own capital.

The intent here is not to debate whether My Ryan’s characterization of the Social Security program as a Ponzi scheme is accurate.  The program’s intended design, however, is that millions of Americans pay into a retirement savings for themselves with an expectation that it remains as part of their retirement income. The GOP has been licking their chops at the prospect of getting capitalist hands into the money pot that is SSA and HMS. Just think of the tremendous amounts of capital that the United States could reap in revenue from aggressive (e.g. risky) forms of investment using the trillions of dollars from those accounts. If one can invest $5000 and get a modest 6.25% return that is roughly an average of $325 per year. If one can invest say $5 trillion and get that same return which is roughly $325 billion and suddenly, California no longer has a deficit issue?  Yet, that 6.25 % return is a great day if the investment is sound and in actual capital, but we all know what happens when people are given a bunch of money and told to create profit (e.g. Lehman Brothers, Goldman Sachs, Merrill Lynch, Madoff). Odd, consider that people were giving money to a man named Madoff that actually “made off” with their money and left the beneficiaries penniless.

That is precisely what we can envision with the Ryan-Romney plan for SSA and HMS. We all know "why" because that is what caused the crashes in the Great Depression, 1980s and 2000s: greed.   Private investors will be granted access to this huge mountain of cash with the idea that these "qualified" people know how to capitalize.  These people will then design complex instruments, funds, ETFs, bonds, derivatives, transaction fees, balloon profits, and this will be backed by the full faith of the federal government (see Fannie Mae and Freddie Mac). They will sell to beneficiaries that they can maximize their return using these complicated or expensive instruments, and supposedly, with the assurance of the federal government, the money will be safe. One firm will be able to handle the retirement account differently than the other, and thanks to the recent ruling by the Supreme Court with respect to the Affordable Health Care Act, people can be compelled to pay into the system or fear a tax penalty. That is until the next bailout is needed from the American people to re-fund the eventually destroyed SSA and HMS systems. Then, while the Americans are wondering what happened to their retirements, the fat cats that engineered the schemes will be able to continue living the high-life and toasting their “success”. 

We have a clear choice between the Obama and Romney teams, and the future of SSA and HMS are at the heart of the difference. Further, the collapse of the entitlement programs will mean a collapse in the American markets and financial system that will paralyze the global economy where 2008 will seem like a bad fart.  I may have painted a dire prediction of privatization of those funds, but given the recent balloon and bust of the mortgage crisis, can we seriously expect something different than this? Can we risk losing our retirements? That is a recipe to corrupt our government insurance programs.