The 3rd rail: Candidates take on Social Security

NEW YORK (CNNMoneycom) -- Among the many promises being made by the 2008 candidates for president, fixing Social Security is getting increasing play on the campaign stump.

The Social Security program, funded by taxes on workers' wages, currently takes in more than it has promised to pay out. But in large part because the number of workers to retirees will shrink, the system if left unchanged won't be able to pay out all of the benefits promised to future retirees.

By 2017, the revenue coming in will be less than the benefits promised. The government will make up the difference by paying back the money it credited to the program's trust fund over the years when it borrowed the surplus taxes paid into Social Security.

Come 2041, the trust fund will be tapped out and in-coming funds are projected to cover only 75 percent of promised benefits.

Social Security is a pay-as-you-go system, meaning that today's workers pay for today's seniors. The first $97,500 of wages are subject to the 12.4 percent payroll tax. Next year, that wage cap rises to $102,000. Typically, half the tax is paid by workers, and the other half is paid by employers. Self-employed workers pay the full amount and get a deduction for half on their income tax return.

President Bush in 2005 made Social Security reform a key part of his economic agenda, but his insistence that any solution include giving workers the option to divert some of their payroll taxes into individual investment accounts was shot down. While accounts may offer workers a chance to bolster retirement savings on top of their Social Security benefits, even proponents acknowledge that accounts will not resolve the system's long-term funding shortfall.

There are many ways to make the system solvent for the long run, but they generally involve raising taxes or reducing benefits, either directly or indirectly. For instance, raising the retirement age - which currently is 67 for future retirees born in 1960 or beyond - means you would pay into the system at least as long as you do now, but you would receive benefits for fewer years.

The magnitude and pain of the changes can be lessened in two ways, according to actuaries: make the changes sooner rather than later, so that they affect more people but in a less dramatic manner; and implement a combination of tax increases and benefit reductions, so that neither is particularly steep. (Here's a closer look at the different options that have been debated.)

Many of the candidates for president have said that they would seek a bipartisan solution but they also have expressed their most or least preferred options.

Below are the Social Security proposals and suggestions made so far by the front-runners. Those front-runners were determined by the results of CNN's most recent national polls in which a candidate got at least 10 percent of the vote.

Among the Democrats, they are Hillary Clinton, Barack Obama and John Edwards. From the Republican field, there is Rudy Giuliani, John McCain, Mitt Romney, Fred Thompson and Mike Huckabee.

Clinton: Has opposed President Bush's plan to let workers to divert some of their Social Security payroll taxes into individual investment accounts.

Clinton also has indicated that she would not favor eliminating the cap on the amount of income subject to the Social Security tax.

She has pledged to stop the practice of the federal government borrowing the surplus paid into Social Security, and has indicated she would convene a bipartisan commission to examine ways to ensure long-term solvency.

Obama: Opposes Bush plan allowing workers to divert some Social Security payroll taxes into individual investment accounts.

Obama has also said he wouldn't favor raising the retirement age or cutting benefits, but he would consider increasing the payroll tax to help resolve anticipated shortfalls in Social Security.

He has not proposed any specific way to adjust the cap - nor has he proposed eliminating the cap entirely, which would mean all wage income would be subject to the tax.

But he has stated in various venues that "his inclination ... has been for a 'donut' where the uncapping would take place above some threshold income level - probably around 200,000 or 250,000" his economic adviser Austan Goolsbee said in an email.

A donut would protect a certain portion of income (e.g., between $100,000 and $200,000) from the payroll tax and could be phased in over decades, Goolsbee said.

Edwards: Opposes President Bush's idea to let workers divert some Social Security payroll taxes into individual investment accounts.

Edwards has said he favors increasing the cap on earnings subject to the Social Security tax but has also said he would support a "donut" to protect a portion of income from the tax. On CNN's "The Situation Room" he said, "I would create a buffer zone between about $97,000 and $200,000. ... Beyond that, I would raise the cap."

Giuliani: Supports individual investment accounts as a part of Social Security.

But Giuliani has said he would not raise taxes to address Social Security's long-term solvency issues.

McCain: Would be open to the idea of individual investment accounts so long as they do not divert payroll taxes from Social Security. (See correction below.)

McCain has said he will submit a plan to save Social Security and Medicare. Douglas Holtz-Eakin, his economic adviser and former director of the Congressional Budget Office, told CNNMoney.com that McCain believes Social Security funding can be shored up by reducing growth in benefits without raising taxes. But he recognizes it's a political issue, more than it is about tax economics, and he's in favor of anyone bringing ideas to the table, Holtz-Eakin said.

Romney: Has said he opposes raising payroll taxes and doesn't find the idea of raising the retirement age as attractive as creating individual investment accounts and using the current Social Security surplus to help fund them.

He would also favor indexing the benefits of future high-income retirees to inflation rather than wages as is currently the case. That would have the effect of reducing benefits from their current promised levels because inflation tends to grow more slowly than wages. Making the change only for high-income workers is known as progressive indexing because it attempts to provide for faster growth in benefits for low-income workers.

Thompson: Has said he opposes raising payroll taxes. But he would index the growth in Social Security benefits to inflation rather than wages.

Thompson, according to various reports and Thompson's public comments, also favors letting workers have the option of an "add-on" individual investment account. Workers would continue to pay into Social Security but would be allowed to put in an additional 2 percent of their pay into their account and the federal government would offer matching contributions from the surplus that has been paid into the Social Security system.

Huckabee: In conjunction with his desire to move toward a consumption tax system in which you would pay taxes on your purchases but not on your income or investments, Huckabee would favor eliminating Social Security taxes. And it's been reported that he supports the idea of workers using individual investment accounts, although no details are offered about how they would be funded.

In a presidential campaign forum in October, Huckabee seemed to imply that moving to a consumption tax wouldn't eliminate Social Security. "It changes the funding stream ... . [I]nstead of making Social Security funded solely by payroll taxes, which is a declining source of revenue ... more people are getting their wealth from sources other than wages in the future," he said.

One way he suggested the system could be reformed is to allow new retirees to opt for a lump-sum payout. "Rather than getting the long term payout, which is creating an enormous burden on the Treasury because of the uncertainty of how long that person is going to get the monthly check, taking the option of a one-time buyout, tax-free, with which they could purchase an annuity or give it to their children, their grandchildren, or keep it tax-free."

Correction: The original version of this article incorrectly stated that John McCain supports President Bush's plan to allow workers to divert some Social Security payroll taxes to fund individual investment accounts. He does not support the idea of diverting payroll taxes to fund accounts.