Obama vs. McCain: Social Security

donna | 6/17/2008 6:32 pm | Daily Briefing

When George Bush took office nearly eight years ago, it was clear that an adjustment of some sort was needed to ensure the long-term health of Social Security. No action was taken to solve the problem during Bush's term in office, and now the fund's trustees are saying they are becoming increasingly concerned about the lack of action taken to solve the problem. The current surplus will begin to go down starting with the retirement of baby boomers in 2011--in the next president's first term in office. What are the two candidates' plans to deal with this crisis?

Senator Obama has reviewed the choices for funding the system as it currently works (with current workers funding the benefits of current retirees). The choices are an immediate increase in the tax rate from 12.4 to 14.1 percent on the current level of taxable income, a reduction in benefits of 12 percent (through across-the-board reductions and/or increase in retirement age), or removing the exemption on wages of $250,000 or more. A combination of these options is also a possibility. Senator Obama's position is that he would maintain the cap on income from $102,000 to $250,000 and tax all wages above $250,000. He has indicated this is his preferred option, but he is willing to listen to other options proposed by Congress.

The argument for Obama's plan is that it solves the problem without raising taxes on lower and middle-class workers and it does not reduce benefits or increase the retirement age. The primary argument against this is that it is a 6.1% tax increase on wages above $250,000.

Obama opposes privatization of Social Security. Earlier this week he said: "Privatizing Social Security was a bad idea when George W. Bush proposed it. It's a bad idea today. It would eventually cut guranteed benefits by up to 50%. It would cost a trillion dollars that we don't have to implement on the front end, permanently elevating our debt. And most of all, it would gamble the retirement plans of millions of Americans on the stock market. That's why I stood against it in the Senate, and that's why I won't stand for it as president."

Obama does, however, agree that citizens should be encouraged to build retirement accounts outside of the Social Security system. He has proposed that companies without retirement plans be required to set up and automatically enroll employees in a program with IRA-type accounts. Employees would have the ability to opt out. If they do not, then 3% of their wages would be deposited to the account. For families earning less than $75,000 per year, the government would provide a refundable tax credit for 50% of the first $1,000 saved. This could significantly increase the retirement savings rate for low income American workers. The cost would be $18.8 billion per year.

Senator McCain has made statements that contradict each other and, at times, are unclear. Since at least 1999, he has consistently called for giving workers the option of investing 20% of their Social Security taxes in personal accounts (also known as privatization). In 2004 he said "without privatization, I don't see how you can possibly, over time, make sure that young Americans are able to receive Social Security benefits". He voted for President Bush's proposal in 2006. In March he told the Wall Street Journal "I'm totally in favor of personal savings accounts...As part of Social Security reform I believe that private savings accounts are a part of it--along the lines that President Bush proposed." Earlier this week, though, he said at a town hall meeting "I'm not for quote privatizing Social Security, I never have been, I never will be." Given the number of times he has come out in favor of privatization, I will assume this week's comment was a misunderstanding and he has not actually changed his position.

Senator McCain has said he is willing to work on a bipartisan solution as long as there is compromise. It is unclear whether personal accounts must be part of the compromise. He has made statements that imply that he would be willing to agree to benefit cuts or raising the retirement age as part of a bipartisan agreement. In March his chief economic aide, Douglas Holtz-Eakin told the Wall Street Journal that McCain plans to keep Social Security solvent by reducing the growth in benefits to match projected revenues. "Among the options are extending the retirement age to 68 and reducing cost-of-living adjustments, but the campaign has not made any final decisions. You can't keep promises made to retirees."

Senator McCain has made conflicting and unclear statements regarding whether he would agree to a payroll tax increase or lifting the wage cap. Here is a typical exchange. This one is from Fox News Sunday last year:

Q. Back in 2005 you said you could support an increase in Social Security taxes as part of a compromise. Do you stand by that?

A. As part of a compromise, if you come up with a benefit, I can accept almost anything, but it's got to be part of a compromise. Am I for raising anybody's taxes? No, I am not. I am unalterably opposed to doing so. I will not support a tax increase; it's off the table, certainly, now.

It appears both candidates are serious about Social Security reform, but they have very different ideas on how to get there. Obama's plan will result in higher taxes on the wealthy, protect the safety net, and maintain the existing retirement age and benefits. He will also encourage personal retirement accounts with a tax credit that will cost $18.8 billion per year. Senator McCain will most likely keep the payroll tax the same, but would cut benefits and/or increase the retirement age. His plan for personal accounts would result in approximately $1 trillion in transition costs. This would need to be borrowed. Assuming a 3% annual interest rate, this would be about $30 billion per year. Some estimates show a transition cost of over $2 trillion, which would result in a doubling of the interest cost.

Both candidates have shown a willingness to compromise with Congress, but it's questionable whether McCain would accept a compromise solution that almost certainly would not include privatization. (Even Republicans did not support this in 2006 because it's very unpopular with their constituents.) In the end, there is a risk with John McCain that nothing will pass, which could leave the program in much worse financial shape at the end of his term.

John McCain quotes on Social Security:

http://www.ontheissues.org/Economic/John_McCain_Social_Security.htm

Obama quotes on Social Security:

http://www.ontheissues.org/Economic/Barack_Obama_Social_Security.htm

Obama's retirement savings plan:

http://money.cnn.com/2008/06/16/news/economy/retirement_savings/index.htm?cnn=yes

blog entry tag reference

domestic policies | fiscal policy

go to Daily Briefing | Digg this story | add to del.icio.us | print | email