Santa Claus theory
My theory (I admit this might sound stupid)
The creatures wearing red were a reference to Santa Claus. The elders created an imaginary entity to keep their children in line, but it was really them all along.
The kids would be told the truth when they were old enough to understand the bigger, real issues (that the outside world was cruel and they needed to be isolated from it). At this point they'd be entrusted with participating in the farce, dressing as the creatures and convincing the next generation that there would be consequences for misbehavior.