Tuesday, May 27, 2008

IBD: Obama And McCain Divided On Reform For Social Security

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.


Anonymous said...

i have to agree with Biggs that raising the cap is a bad idea.

But cutting benefits is a stupid idea.

There is nothing wrong with Social Security that can't be fixed by a one tenth of one percent increase in the payroll tax when and if an imbalance becomes apparent. This may need to be repeated fora number of years until the demographic changes sort themselves out, but it will occur against a background of a one percent per year increase in wages.

all of the hysteria about a funding crisis for Social Security appears to be based on the idea that we are too dumb to raise our own tax (rate of savings, insurance premium) when we find out we will need to pay for our own longer lifespans.

that, and the appeal to blind stupid greed inherent in the "generational equity" argument.

blind stupid greed is different from ordinary creative greed.


Bruce Webb said...

"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."

No they will get much better benefits through 2040 (up to 60%) and somewhat better benefits after (about 25%). I am not saying that McCain is knowingly lying here, like many he may not actually understand the numbers in question, but I continue to be astonished at how many people will rail on me on the basis of things they 'know' about Social Security.

BTW later this morning I plan a post at AB putting the actual dollars after 'Shortfall' in the context of overall spending. These really are not big dollars, not once adjusted for inflation.

Derrick Max said...

I guess the validity of Bruce's analysis depends on whether you net out non-social security tax increases that will be required to fund the portion of the government that had been funded by the "SS surplus," or to begin paying bonds that will be called by SSA.

On a whole, I think McCain is right -- his generation has paid itself well -- at the expense of future generations.

Anyway, this is a great blog, Andrew...and, I think Angry Bear is a great read too.

Andrew Biggs said...

I think Bruce's point gets back to whether we should think of benefits in real dollar terms or in terms of how much of pre-retirement income they replace. While real dollar benefits will be higher in the future, replacement rates will do down. What can be said is that McCain's kids and grandkids won't do as well from the system as McCain and his mom did; they're benefits will be far smaller relative to the taxes they paid than for earlier retirees.

And thanks Derrick -- much appreciated.

Anonymous said...


replacement rates could be kept the same with a dollar per week per year tax increase while wages are going up ten dollars per week per year.

and the need for the raise is that people will be living longer.

but there is always a way to prune this bush to obscure the fact that people are getting a good deal from social security.

you can, for example, make them feel that they are getting a worse deal than their grandparents.
if you can teach them to ignore all the things their grandparents did to leave them a world where they can make twice as much real money as the grandparents ever did.

derrick seems to think that the money the boomers paid... and lent to the rest of us... has had no influence on our future standard of living.

that might be true, but it wouldn't be the fault of social security. but i wouldn't want to interfere with anyone's right to feel abused on the way to bank.

back in the old days, everyone would have recognized this as the sins of greed and envy. some would not have understood that the nature of sin is not that it hurts god, but that it makes the sinner sick. and certainly unable to perceive reality as it is.