Social Security fixes aren't election fodder

PERSONAL FINANCE

August 31, 2008|By Eileen Ambrose | Eileen Ambrose,eileen.ambrose@baltsun.com

One of the most important issues of this presidential election is hardly talked about - Social Security.

The system needs shoring up. And the earlier we tackle this, the less painful it will be.

If you're in your 20s or 30s, Social Security is your issue. Any fix to the system by Congress and the new president will likely affect your benefits, not the benefits of those who are retired or nearly so.

Of course, younger workers often say they aren't counting on Social Security being there for them. But the fiscal forecast isn't that dire.

Social Security has a $2.2 trillion surplus because it brings in far more in taxes than it pays in benefits. By 2017, the program will start paying out more in benefits than it brings in. By 2041, the trillions in assets will have been spent. At that time, taxes from workers and employers will be enough to pay 78 percent of promised benefits.

"All we have to solve is that extra quarter," says Ron Gebhardtsbauer, head of the actuarial program at Pennsylvania State University. "It's very doable, but nobody wants to talk about it before an election."

As part of a series of occasional articles on how the candidates' proposals affect your pocketbook, let's consider how each man running for president would address this political hot potato.

Both candidates promise to work with Congress to come up with a bipartisan solution to Social Security's solvency. Beyond that, details are slim.

Sen. Barack Obama offers more specifics. As part of the fix, the Democrat nominee wants high-income workers to kick in more to the system.

Right now, you and your employer contribute a combined 12.4 percent of your pay into Social Security on the first $102,000 of wages. Obama wants to create a doughnut hole, where income between $102,000 and $250,000 won't be subject to Social Security tax. But income over $250,000 would be assessed a new tax ranging from 2 percent to 4 percent to be paid by workers and employers. It's unclear whether high-income workers would get an extra boost in benefits for paying more into the system.

This tax wouldn't kick in until a decade or more - after a President Obama would be out of office. But some Social Security experts say the money wouldn't be needed until then because of the surplus.

This alone won't be enough to solve Social Security's problem. But a tax increase almost assuredly will be part of a Social Security fix no matter who wins the election. The Illinois senator deserves credit for at least suggesting a tax increase.

Sen. John McCain has sent out mixed signals.

The Arizona Republican told The Wall Street Journal this year that he favors private accounts "along the lines that President Bush proposed," but said later that he opposed privatizing Social Security. More recently he said "everything" - which could include tax increases - would be on the table when he works with Congress on a fix, but backpedaled when he came under fire from anti-tax conservatives.

If McCain is hard to pin down on Social Security, that's how his campaign wants it.

When a candidate provides details, proposals get caught up in political sniping and Social Security reform can't happen, says Douglas Holtz-Eakin, senior policy adviser. "That's how you get into trouble," he says.

That's also how you keep voters in the dark.

Holtz-Eakin says McCain is opposed to raising taxes to shore up Social Security, but he won't make that a precondition for negotiating with Congress.

But if he's against raising taxes, that leaves benefit cuts. McCain pledges not to reduce benefits for those near retirement, but it does make you wonder what cuts he has in mind for others.

McCain also favors personal accounts as a "supplement" to Social Security, but he doesn't say how they would be structured.

Would they be on top of Social Security, basically allowing workers to steer a portion of their paycheck into a private investment account? That won't fix Social Security's solvency problem. But it could help half of the workers today who have no other savings beyond Social Security, says John Rother, executive vice president of policy and strategy for AARP.

Or would McCain want workers to be able to divert some payroll taxes from Social Security and into a private account, similar to what President Bush wanted a few years ago? That would leave Social Security in worse financial shape.

Holtz-Eakin says these questions aren't important now. What matters, he says, is that personal accounts could be part of a larger reform that fixes Social Security's long-term solvency problem.

But these details do matter. And because McCain promotes personal accounts, he needs to tell us more.

The last bipartisan effort to pull Social Security out of a financial crisis occurred in 1983 and resulted in higher payroll taxes and a gradual increase in the age to receive full retirement benefits. Young workers must wait until they're 67 to be eligible for full benefits.

The future fix will likely be a mix of taxes and benefit cuts, including raising the age for receiving full benefits.

The American Academy of Actuaries came out this month in support of increasing Social Security's retirement age as part of the solution because people are living longer.

The academy didn't suggest a number. But Penn State's Gebhardtsbauer says raising the age to 70 by 2030 would fully cure Social Security's problem.

Social Security is one of the most successful government programs. It must be shored up responsibly. Given the demise of traditional pensions and our low savings rate, younger generations are going to be counting on Social Security - even if they don't think so now.

Eileen Ambrose's column also appears Tuesdays.

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