Plans differ, but candidates agree Social Security needs drastic work

WASHINGTON – Sens. Barack Obama and John McCain are both proposing dramatic changes to Social Security, taking on the financially fragile “third rail” of American politics that Congress and recent presidents have been unable to repair.

McCain’s aides said he favors a bipartisan approach and is open to working with Congress on finding a solution to the long-term solvency of the New Deal-era program, indicating he could support an array of ideas such as raising the retirement age, reducing scheduled increases in benefits and allowing younger workers to put money they currently pay for Social Security taxes into personal savings accounts. President Bush floated a similar idea for private accounts in 2005, but polls found it had little public support.

Obama has been even more specific. The Democratic senator from Illinois has proposed raising taxes on upper-income Americans to address projected shortfalls in Social Security, but his plan has been greeted with skepticism, even from some in his own party.

Under current law, income up to $102,000 a year is taxed for Social Security, and Obama would create a “doughnut hole” by not imposing new Social Security taxes on income between $102,000 and $250,000. His aides said income exceeding $250,000 would be taxed at a rate of 2 percent to 4 percent, rather than the 6 percent tax that individuals pay toward Social Security on income below the $102,000 cutoff, which is matched by their employer’s paying a 6 percent tax. Employers would also probably pay an additional tax from 2 percent to 4 percent.

Experts predict that proposal would make up less than half of the $4.3 trillion shortfall Social Security is expected to face over the next 75 years.

Combined with Obama’s proposed increases on income taxes for upper-income Americans and state taxes, Republicans argue, individuals who make more than $250,000 could face close to 50 cents in taxes on every dollar that they earned over $250,000 under a President Obama.

“If you believe you should pay more taxes, I am the wrong candidate for you. Sen. Obama is your man,” McCain said in a speech as he began an economic-themed campaign tour in Denver on Monday. “The choice in this election is stark and simple. Sen. Obama will raise your taxes. I won’t. I will cut them where I can. Jobs are the most important thing our economy creates. When you raise taxes in a bad economy, you eliminate jobs. I’m not going to let that happen.”

At a news conference in St. Louis, Obama said the Republican senator from Arizona offered policies that “are very much the same as those we have seen from the Bush administration.”

Some Democrats are questioning Obama’s decision to address Social Security at all. The program is expected to bring in less in taxes than it disburses in benefits sometime in the next decade, although the Social Security Board of Trustees estimates that interest on the program’s bond holdings will keep it from running a deficit until at least 2041.

“From the standpoint of the Democratic Party, I would think it would make the most sense to leave it alone,” said Dean Baker, an Obama supporter and co-director of the District of Columbia-based Center for Economic and Policy Research. “It’s not an immediate, pressing issue.”

Jason Furman, Obama’s economic policy director, emphasized that the proposal is flexible and said Obama would work with Congress to come up with any proposal on the topic. Furman said the campaign has not determined the extent to which Obama would raise taxes or whether people who made more than $250,000 would also receive additional benefits.

Obama has ruled out raising the retirement age or reducing benefits, two other ideas some in Congress have touted for fixing the program.

“He’s setting forth a proposal about where he would start for Social Security solvency that is far more specific and concrete than anything proposed by a presidential nominee in recent memory,” Furman said. Then-Texas Gov. George W. Bush offered ideas on the issue in 2000, including the idea of individual retirement accounts.

Len Berman, the director of the nonpartisan Tax Policy Center, said although Obama “should get credit for doing something about Social Security,” the proposal lacks enough specificity about its tax increases to illustrate how it would help Social Security and whether those increased taxes would slow the economy.

“It would be nice to know how it affects economic incentives,” Berman said.

Henry J. Aaron, an Obama supporter and economics expert at the Brookings Institution in Washington, said he is concerned that the proposal would fundamentally change Social Security. Unlike other government programs, such as Medicaid, that are targeted for low-income people, Social Security has traditionally operated as a program in which participants get more money if they have put more in. A person who pays taxes on $90,000 of income, on average, during his lifetime receives higher benefits than a person who retires after making $50,000 in an average year.

Obama’s proposal could alter that formula because he has not specified whether those making more than $250,000 would receive additional benefits.

“I don’t think this is the right way to raise the cap, although raising the cap is a good idea,” Aaron said. “Traditionally, there is a linkage between benefits and taxes paid. It’s what has helped make Social Security a benefit that people claim with pride.”

McCain supported Bush’s plan for personal accounts in 2005 and has spoken positively about them in his campaign, but aides emphasize that he would seek consensus on the issue.

Aides said McCain would not support a tax increase to address the solvency of the program, but they did not give further details.

Damien LaVera, a spokesman for the Democratic National Committee, described McCain’s plan as a “decision to repackage President Bush’s failed and flawed plan to privatize Social Security.”

Maya MacGuineas, a budget expert at the New America Foundation who advised McCain on Social Security in 2000, said of McCain’s proposal: “In terms of details, there is so much to be filled in.”