Correction to This Article
Earlier versions of this article, including in the print edition of today's Washington Post, misstated the maximum tax rate on income exceeding $250,000 a year that Sen. Barack Obama has proposed as part of his Social Security reform plan. Under the Obama plan, the tax paid by employee and employeer would not exceed 4 percent.
Candidates Diverge on How to Save Social Security

By Perry Bacon Jr.
Washington Post Staff Writer
Tuesday, July 8, 2008

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 Democrat 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. 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 people 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 probably pay an additional tax, but the total tax paid by both employee and employer would not exceed 4 percent of the amount of income earned over $250,000.

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. Senator Obama is your man," McCain said in a speech as he began an economic-themed campaign tour in Denver yesterday. "The choice in this election is stark and simple. Senator 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 that 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 D.C.-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 that 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 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. Bush offered ideas on the issue in 2000, including the idea of individual retirement accounts.

During the Democratic primaries, Obama criticized Sen. Hillary Rodham Clinton (N.Y.) for not giving a specific proposal on Social Security.

"Conventional thinking in Washington says that Social Security is the third rail of American politics," Obama said in October. "It says you should hedge, and dodge and spin, but at all costs, don't answer."

At the time, he said he would consider applying the payroll tax to all income, which would largely fund Social Security for the next several decades. But his campaign has emphasized in recent weeks that he would raise taxes only on Americans who make more than $250,000.

Experts say that while that saves Obama from being criticized for adding taxes for those who make $102,000 to $250,000, it also brings in fewer dollars for the system, less than half of what is needed to match the shortfall.

Len Berman, the director of the nonpartisan Tax Policy Center, said that 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 in benefits 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."

Furman noted that Medicare, the health-care program for the elderly, is popular, even though it does not limit the amount of income that can be taxed to pay for it, meaning that wealthy people pay more into the system.

"The most important factor in public support for Social Security is the confidence that it's going to be there when you retire," he said.

Obama is offering a significantly more specific idea than either Bush or Sen. John F. Kerry (D-Mass.) did as candidates in 2004. Bush declined in 2004 to say how he would address Social Security's shortfall, mentioning only his backing of personal accounts, which found little support the next year on Capitol Hill.

McCain supported those accounts in 2005 and has spoken positively about them in his campaign, but aides emphasize that he would seek consensus on the issue.

"John McCain is committed to honoring the promise of Social Security and believes that his bipartisan record will serve him well as he works across the aisle to ensure the long-term solvency of the program," said Tucker Bounds, a McCain spokesman.

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 his proposal: "In terms of details, there is so much to be filled in."

View all comments that have been posted about this article.

© 2008 The Washington Post Company