Fungibility notwithstanding, obviously it would be absurd at this point to deem Social Security's payroll tax revenues as available for any other purpose, such as funding current workers' future benefits, unless one made it a true break-even by treating some other set of equivalent or greater revenues as off the table instead. In that sense, McCain is presumably just showing his ignorance via the "disgrace" comment - perhaps distractedly channeling half-digested talking points from Bush's 2005 Social Security campaign.
But he does actually have a point, which is that absent a clearer link between individual-level taxes and benefits than Social Security currently offers, you get reduced transparency that may have some good effects but also has significant (and to my mind predominant) bad ones.
Keeping the Social Security tax-benefit link unclear has long been rationalized on the left as a device to make the program more progressive than people actually think it is - saying you get your own money back, whereas in fact the hope is that it's being redistributed downward. (This from the benefit formula, although its punch is reduced by the fact that high-income individuals live longer and thus get the life annuity for longer terms.)
But whether or not the muddied tax-benefit link has this arguably desirable effect, it also tends to obscure both generational redistribution from young to old that arguably deserves greater scrutiny, and other quite anomalous redistribution through the program such as from singles and two-earner couples to one-earner couples.
In my Social Security book (see the left-hand side of this blog for a link), I discussed "progressive privatization," a device I thought of much less in terms of the grossly overrated (during the stock market boom) issue of individual investment choice than of making redistribution through the program more transparent.
Anyway, to throw McCain a rare bone here, he tried to explain his comments by arguing that it's unfair for current workers to pay Social Security taxes without their being sure of getting commensurate benefits. One can perhaps credit him with making the point that the program has questionable distributional effects by reason of its obscuring the tax-benefit link (though the problem he refers to is largely a function of sustainability rather than projected benefit levels themselves).
And if that's not enough of a bone, too bad as I have a beach out here in Hoi An to get back to.