IBD: Obama And McCain Divided On Reform For Social Security

Jed Graham writes in Investor's Business Daily on how Senator's Obama and McCain stack up on Social Security reform. I'm briefly quote, and will expand on the point at the bottom.

The Social Security fixes touted by John McCain and Barack Obama couldn't be any further apart — unless Obama was offering a true fix.

McCain would close looming Social Security shortfalls by curbing benefit promises. Obama would leave benefits untouched and rely just on tax hikes — though not nearly enough to erase the funding gap.

But their plans do share one common feature: Both would likely be dead on arrival in Congress, say Social Security reform advocates.

"They're both very politically attractive options if you're running in a primary," said Andrew Biggs, resident scholar at the conservative American Enterprise Institute. "I don't see either as being politically feasible."

Still, their plans give a sense of the priorities each would bring as president to any serious talks with Congress. McCain would push for Social Security reform that depends much more on spending restraint than new taxes. He is prepared to ask for broad sacrifice.

"My children and their children will not receive the benefits we will enjoy," he said in a 2006 speech on entitlements. "That is an inescapable fact, and any politician who tells you otherwise, Democrat or Republican, is lying."

Half A Plan

Obama doesn't want to ask anyone who isn't rich to sacrifice. He'll push for a big tax hike on higher earners and eschews benefit cuts.

"The best way forward is to adjust the cap on the payroll tax so that people like me pay a little bit more and people in need are protected," Obama said recently. "That way we can extend the promise of Social Security without shifting the burden on to seniors."

The 12.4% Social Security tax phases out at $102,000, but Obama would slap the tax on high earners.

He says he would create a "donut hole," shielding some wages above $102,000 from the tax so as not to "ensnare middle class Americans."

Only the tiny fraction of workers earning perhaps over $200,000 would be hit. While workers only pay half the 12.4% tax, employers would most likely pass on their share by reducing worker salaries.

This hike would come on top of Obama's bid to reverse the Bush tax cuts for higher earners to pay for expanding health care coverage. Thus the top marginal rate on wages could near 55% vs. 37.9% now, including Medicare taxes.

By reserving such a big tax hike for Social Security, Obama would limit the options for dealing with far more daunting fiscal challenges posed by Medicare and Medicaid.

"It's important for people not to look at Social Security in isolation," said Robert Bixby, executive director of the fiscal watchdog Concord Coalition.

"It's easier to do cost control for Social Security than it is for Medicare," he said. "If you use the revenue option for Social Security, that means it might not be available for other things."

But Bixby suspects that any politically viable Social Security fix will include benefit cuts and tax hikes.

Closing entitlement deficits by relying "exclusively or perhaps even primarily on increased revenues . . . could significantly impair economic growth," the Congressional Budget Office has said.

An IBD analysis shows that a 12.4% tax on wages over $200,000 would only delay Social Security's cash-flow deficits by four years to 2021. Over 75 years, the plan would erase just half of the $6.5 trillion unfunded liability at present value.

That includes $2.2 trillion of government IOUs in the trust fund. As Social Security's trustees noted last year, "Treasury must still come up with this amount in future cash" to make good on those IOUs.

McCain has yet to spell out how he'd alter benefits, such as lifting the retirement age. But the changes would be big. By 2041, Social Security could only pay 78% of scheduled benefits without tax hikes.

McCain has long backed the idea of letting workers invest some of their Social Security taxes to try to offset some of the benefit cuts.

President Bush pushed personal accounts in 2005, but made little headway on Capitol Hill.

Obama has attacked the idea as a way to "gamble away people's retirement on the stock market."

In a possible hint at compromise, McCain said he favors "some form of personal retirement accounts."

McCain might accept accounts financed via a dollop of income on top of the payroll tax, Bixby says.

"Then you get into the question of whether it's a tax increase," he said. "I don't think it is. The money wouldn't be going to the government."

Some context on my thoughts: In a Republican primary, it's almost impossible to talk about any form of increased revenues for Social Security, while in a Democratic primary it's almost impossible to talk about any reductions in benefits. This is not to say that either candidate favors a path other than the one they've outlined, but merely what is appealing to either party's base is not necessarily something that can pass in Congress and be signed by the President. Ultimately, Social Security reform will be a package of different provisions. While interest groups on either side pressure candidates to rule out provisions they don't favor, Congress and a President McCain/Obama will in the end have to say yes or no to a package. Should a president oppose an otherwise perfect bill because it contained a penny of tax increases/benefit cuts? If not, then it probably makes sense for them to keep their options open and focus on how to build a process where both sides can get together to hash things out.