Forget flag lapel pins or lipstick on pigs — let’s tackle one of the real issues in the run-up to the presidential elections. Here’s a primer on where McCain and Obama stand on Social Security and Medicare reform.

In 2008, more than 50 million Americans will receive nearly $614 billion in Social Security benefits. Nine out of 10 individuals age 65 and older receive Social Security benefits.

For years, the Social Security program has been taking in more in payroll taxes from existing workers than it needed to fund benefits. But that surplus is shrinking, and eventually the system won’t be able to pay out all of the promised benefits it collects in payroll taxes.

The basic problem: the number of workers compared to retirees has begun to shrink, so there are fewer workers to support each retiree than there used to be.

The federal government will have to start paying back what it owes the Social Security trust fund in 2017 so the program can continue paying 100 percent of benefits, according to the Social Security and Medicare Boards of Trustees’ 2008 annual report. If the system is left unchanged, shortfalls will grow larger with each passing year so that, by 2041, the Social Security trust fund will be exhausted and able to pay out only 78 percent of benefits promised to future retirees.

“Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 14 percent in payroll tax revenues (from 12.4 percent to 14.1 percent) or an immediate reduction in benefits of 12 percent or some combination of the two,” float the trustees. “Ensuring that the system is solvent on a sustainable basis beyond the next 75 years would require larger changes, because an aging population and increasing longevity cause the projected current-law OASDI [Old Age, Survivors and Disability Insurance] cash-flow deficits to be substantially larger after the 75-year projection period than they are on average during the period.”

That is why both United States presidential contenders Barack Obama and John McCain are 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. The analogy to the electrified third rail on the subway systems has long been used to refer to Social Security in American politics: touch it and you’re dead.

Earlier this month both candidates addressed the issue separately at AARP’s annual “Life@50+” conference.

Aside from both candidates agreeing that adjustments to the Social Security formula are necessary and pledging to work across the political-party aisle to restore the program to fiscal health, each presidential contender is offering a different vision for solving the current and future financial problems of Social Security, which was signed into law 73 years ago.

Republican McCain has been less specific about how he would extend the program’s solvency, compared with Democrat Obama. He has said he opposes increasing taxes even as he vowed to keep “all options” on the table. McCain said he remains open to personal accounts, also called private accounts, as options for younger people. “There may be a role for private investment accounts for younger workers as long as they are not a substitute for insuring the solvency of the system and does not affect the system,” McCain said.

“Partial privatization” under McCain’s reform proposal, according to the National Center for Policy Analysis (NCPA), would “provide younger workers the option of putting a portion of their earnings into personal savings accounts in return for reduced future benefits from the Social Security system.”

“We’re not going to privatize Social Security,” McCain said, in the same speech emphasizing that his proposal for setting up individual investment accounts would be voluntary, giving young workers the option of setting up their own retirement accounts.

In 2005, President Bush pushed hard for a private-accounts plan, wanting to set up separate accounts for young and middle-aged workers, allowing them to invest in stocks and bonds rather than sending their Social Security payments to the government’s trust fund. Under this concept, Social Security would resemble a 401(k) plan. Democrats, of course, were unified in killing the Bush plan.

Indeed, Obama has said he remains strongly opposed.

“Privatizing Social Security was a bad idea when George Bush proposed it, and it’s a bad idea today,” Obama said. “It would take the one rock-solid, guaranteed part of your retirement income and gamble it on the stock market.” Moreover, the Democrat’s fact sheet for seniors states, “Privatization tears the fabric of Social Security — the idea of mutual responsibility — by subjecting a secure retirement to the whims of the market, and that is not an acceptable way to strengthen this program.”

“Obama does not support uncapping the full payroll tax of 12.4 percent rate,” his Web site currently states. However, in the Sept. 6 AARP address, the Democratic nominee said he would shore up the system by raising taxes on higher earners. Specifically, in about a decade he’d start levying the Social Security payroll tax once income goes above $250,000 a year, charging about 2 percent to 4 percent of income for employees and employers combined. Whether that would be enough to close the entire gap remains unclear. Social Security payroll tax is currently capped at $102,000 in annual income.

For many of today’s retirees, it’s becoming increasingly difficult to balance threatened retirement funds and medical costs. “In 1935, the life expectancy of a 65-year-old was 12½ years,” the official Social Security Web site points out. “Today it’s 18 years.”

Yet problems related to Medicare, the federally funded health care program for Americans aged 65+, are perhaps even more complicated. A major reason for this lies in the government having to find a way to slow spending on health care.

WiseGEEK sums up the political (and social) contention this way:

Medicare reform issues have plagued Congress for several years, and a reform bill with a prescription drug benefit was passed in 2003. Because of the changing needs of senior citizens and rising medical costs, this is an issue that Congress will probably continue to wrestle with for many more years. It is difficult to create a “one-plan-fits-all” system.

Both Republican and Democratic candidates vow to improve the quality of care, whether through “preserv[ing] the advancements in medical science” (McCain) or “protecting seniors from fraud” (Obama).

McCain’s particular proposal on reforming Medicare is to lower premiums for seniors while also reducing the growth of spending on Medicare. Obama’s proposal places emphasis on reducing waste in the Medicare system, including “eliminating subsidies to the private Insurance Medicare Advantage program.”

“The financial difficulties facing Social Security and Medicare pose enormous challenges. The sooner these challenges are addressed, the more varied and less disruptive their solutions can be,” states the Social Security and Medicare Boards of Trustees’ 2008 annual report. “We urge the public to engage in informed discussion and policymakers to think creatively about the changing needs and preferences of working and retired Americans.”

If you think you have a better idea for fixing Social Security and/or Medicare, you can find out by playing the Social Security Game, created by the American Academy of Actuaries. This online game lets you test out different benefit reductions and revenue increases and tracks how far each choice goes toward solving the problem. It also provides some insight into the pros and cons of potential fixes.

Resources

Social Security Basic Facts
Social Security Online, Aug. 20, 2008

Status of the Social Security and Medicare Programs
Social Security and Medicare Boards of Trustees, 2008

Social Security Reform and The Election
National Center for Policy Analysis, 2008

Reforming Washington to Regain the Trust of Taxpayers
JohnMcCain.com

Jobs for America: The McCain Economic Plan
JohnMcCain.com

McCain Speaks at Life@50+ Event
AARP, Sept. 6, 2008

Seniors & Social Security
BarackObama.com

Barack Obama: Helping America’s Seniors
BarackObama.com

Obama Speaks at Life@50+ Event
AARP, Sept. 6, 2008

What is Social Security?
WiseGEEK.com

Additional

John McCain on Social Security
OnTheIssues.org

Barack Obama on Social Security
OnTheIssues.org