McCain's Social Security Plan Would Cut Benefits To People Who Already Paid For Them

Franklin Delano Roosevelt, signing statement, The Social Security Act. August 14,1935.

"We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age."

At the time it was considered social engineering. Concerns over global and even national trends in population were as much a part of the decision as was the simple humanity of it. Income security, the reasoning goes, would alleviate the need for large families, the parochial solution for retirement income. That part of it has worked spectacularly, perhaps so well that its success even threatens the program. Fewer children equals fewer contributors.

It has been in place for 73 years and for many is the sole source of income in old age. It is immensely popular with people in all strata of society because it is an extraordinary good deal, if you live long enough. To break even on it only takes about 12 years of retirement, attainable by fully half of the population.

Social Security has been troubled of late. I am part of the problem, born 1951, I am of the generation that will stress the system, some say even break it. At a time when retirement savings are at an all time low and private companies have been curtailing pension plans, Social Security becomes all that much more important to the public.

What's wrong? A little deeper history.

When it was instituted, Social Security operated by collecting about what it needed to meet current benefit payments. What came in was paid out. In 1982, that all changed. During the Reagan Administration, Alan Greenspan proposed that SSA taxes be increased to save up for the pending retirement of the baby boomers.

The Greenspan plan sunk increases in collections of SSA tax into government bonds in the Social Security Trust Fund. The, perhaps unintended, consequence was essentially force feeding of the government coffers. In effect, the government got a loan that it did not need from every American worker. The income tax was cut, eliminating most of the upper brackets and the SSA collections were essentially passed on to those in higher income brackets.

Under Clinton, the force feeding of SSA collections into government began to be referred to as the Social Security Surplus. Clinton used it to pay down other national debt, rightly assessing that in order for the debt to the Trust Fund to be repaid, we would need a solvent government. Paying down the extra-Social Security debt and balancing the budget seemed to assure that the government's indebtedness to the Greenspan plan could be serviced.

Bush 43 came along and reversed what Clinton had accomplished by lowering taxes even further and making the repayment of the SSA Trust account virtually impossible without raising taxes.

So there you have it. The Greenspan plan could not have worked unless the SSA Trust were somehow held in cash or private securities and not government bonds. What has been referred to as "raiding" the SSA trust fund ensued. But that is a misnomer. Government was force fed from the SSA Trust fund and instead of using that force feed to retire the national debt, Republicans used it to cut taxes for the wealthy. In as plain an English as it can be put, your Baby Boomer SSA premium you paid ended up in the hands of the wealthy. The solution is for them to pay it back.

Now having laid out the problem, lets examine the solutions for this problem that are proposed by the two Presidential candidates.

Obama vs. McCain

First of all, Obama has a detailed plan for retirement security, over and above Social Security, enunciated on his website. McCain does not even mention Social Security on his website.

Obama proposes this to "fix" Social Security, paraphrasing from his website:

"Ask those making over $250,000 to contribute a bit more to Social Security. Those making over $250,000 to pay in the range of 2 to 4 percent more in total (combined employer and employee). "

Although not mentioned specifically, the roll back of the Bush tax cuts would also help. And again, the main beneficiaries of the Social Security Surplus were those making more than $250, 000 per year.

Obama's plan appears to be consistent with the facts of what happened to the Social Security Surplus, recognizing that there were elements of society that have enjoyed a benefit from that surplus and asking them to give some back.

John McCain consistently proposes, as the AFLCIO website reports, diverting some percentage of the SSA income stream to private accounts, or "privatization" of Social Security. This does nothing whatsoever to solve the projected shortfalls in funding that will begin in about fifteen years. And the debate over the wisdom of placing tax collections in private investment is as old as the program itself. But that is a subject for another setting.

So essentially McCain's plan must be characterized as simply doing nothing, effectively cutting benefits to the people who paid for them already. And that characterization, that they have paid for them, may elicit some criticism from people who do not understand that the Greenspan plan was an exception to the formula of Social Security. Before Greenspan, it was current workers supporting retired workers. Greenspan made it, by collecting more money than current obligations, a loan to the government by the Baby Boomers.

Raising Taxes, oh my!

Finally, on taxes and the economy, the Republicans and some Democrats even, have it wrong. The conventional wisdom is that higher taxes hurt the economy. There is no actual evidence of that. In fact if you plot tax rates against GDP, there is no observable correlation. As this is one of the key arguments against raising taxes, it is an important concept to understand.

Taxes are GDP neutral because the money paid to government in taxes does not leave the economy. Similarly, benefits distributed to retirees through Social Security do not leave the economy. All that is at stake is where and how the money gets spent, on, say, a textbook or a six pack.

The more money there is in circulation and the faster it changes hands, the better the economy, up to the point where it is growing too fast, creating inflation.

Money in the hands of the working class creates economic prosperity from the bottom up by increasing demand. Wealth, capitalism, cannot create prosperity is absence of demand. That is the reason that countries where the population is poorer have lousy economies.

This week OffTheBus is publishing a variety of stories that cover the policy differences between Senators John McCain and Barack Obama. If you have a policy expertise and would like to participate, please see Calling All Policy Gurus.