debate over Social Security reform is reminiscent of the discussions that
The Problem with Social Security
Social Security is a pay-as-you-go system under which taxes collected from today's workers are used to pay today's retirees. That was sustainable in the past; for example, in 1950 there were 16 workers providing benefits for each retiree. However, today the ratio has dropped to 3 workers for each retiree, and by the year 2030 the ratio will be 2 to 1.
One of the most
prominent proposed reforms would allow younger workers to divert some of the
payroll taxes they already pay to create personal retirement accounts. The
burden on future taxpayers would decline as retirees draw retirement benefits
from their personal accounts, reducing the demand for taxpayer-funded benefits.
Current and near-retirees would be unaffected and would continue to receive
currently scheduled benefits. But how should the new accounts be structured? Some point to
Social Security Act permitted municipal governments to opt out of the system -
a loophole that Congress closed in 1983. In 1981, employees of
In 1979, many county workers were concerned about the soundness of Social Security, as many people are today. We could either stay with it - and its inevitable tax increases and higher retirement ages - or find a better way. We sought an "alternative plan" that provided the same or better benefits, required no tax increases and was risk-free. Furthermore, we wanted the benefits to be like a savings account that could be passed on to family members upon death.
Our plan, put together by financial experts, was a "banking model" rather than an "investment model." To eliminate the risks of the up-and-down stock market, workers' contributions were put into conservative fixed-rate guaranteed annuities, rather than fluctuating stocks, bonds or mutual funds. Our results have been impressive: We've averaged an annual rate of return of about 6.5 percent over 24 years. And we've provided substantially better benefits in all three Social Security categories: retirement, survivorship and disability.
The Galveston Plan was implemented just before the U.S. Congress passed a reform bill in 1983 that closed the door for local governments to opt out of Social Security.
To be sure, our plan wasn't perfect, and we have made some adjustments. For instance, a few of our retired county workers are critical of the plan today because they say they are making less money than they would have on Social Security. This is because our plan allowed workers to make "hardship" withdrawals from the retirement plan during their working years. Some workers withdrew funds for current financial problems and consequently robbed their own future benefits. We closed that option in January 2005.
· Workers making $17,000 a year are expected to receive about 50 percent more per month on our alternative plan than on Social Security - $1,036 instead of $683. [See the Figure.]
· Workers making $26,000 a year will make almost double Social Security's return - $1,500 instead of $853.
· Workers making $51,000 a year will get $3,103 instead of $1,368.
· Workers making $75,000 or more will nearly triple Social Security - $4,540 instead of $1,645.
Two government studies of the Galveston Plan - by the Government Accountability Office and the Social Security Administration - claim that low-wage workers do better under Social Security. However, these studies assumed a low 4 percent return, which is the minimum rate of return on annuities guaranteed by the insurance companies. The actual returns have been substantially higher.
Guidance for Today's Reformers
Congress could consider making participation in any privatization plan voluntary at first. We made our plan voluntary in the beginning and 70 percent joined. It later became mandatory, and now there is full participation. Also, if some workers remain uncertain about investing a portion of their contributions, the plan could include a guarantee that low-income earners receive the same funds they would get with total participation in Social Security.
Our experience has shown that even though low-income workers would do better, a guarantee would ease their worries. Moderate- and higher-income workers would do much better, as ours do, because they have invested more in the plan and are not prejudicially punished or "topped out" on retirement benefits, as they are in Social Security.
debate about whether to partially privatize Social Security, the
Most important, we didn't force our children and grandchildren to be unduly taxed and burdened for our retirement while these fine young people are struggling to raise and provide for their own families.
What has been