A model for Social Security reform

[Martrae]

A case study already exists in Galveston County, Texas — and might offer some lessons for lawmakers in Washington.

By Ray Holbrook with Alcestis “Cooky” Oberg

The current debate about reforming Social Security reminds me of the discussions that occurred in Galveston County, Texas, in 1980, when our county workers were offered a different, and better, retirement alternative to Social Security: They reacted with keen interest and some knee-jerk fear of the unknown. But after 24 years, folks here can say unequivocally that when Galveston County pulled out of the Social Security system in 1981, we were on the road to providing our workers with a better deal than Franklin Roosevelt's New Deal.

When I was county judge 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 about 6.5% annual rate of return over 24 years. And we've provided substantially better benefits in all three Social Security categories: retirement, survivorship, disability.

Upon retirement after 30 years, and assuming a more conservative 5% rate of return, all workers would do better for the same contribution as Social Security:

•Workers making $17,000 a year are expected to receive about 50% more per month on our alternative plan than on Social Security — $1,036 instead of $683.

•Workers making $26,000 a year will make almost double Social Security, $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.

•Our survivorship benefits pay four times a worker's annual salary — a minimum of $75,000 to a maximum $215,000 — rather than Social Security's customary onetime $255 survivorship to a spouse (with no minor children). If the worker dies before retirement, the survivors receive not only the full survivorship but get generous accidental death benefits, too.

•Our disability benefit pays 60% of an individual's salary, better than Social Security's.

In 1980, labor unions and some traditionally liberal Democrats provided mighty opposition. They considered taxpayer-fed Big Government programs the only secure ones, to the exclusion of other options. However, we held meetings that included debates with Social Security officials and put it to a vote: Our workers passed it by a 3-to-1 margin in 1981 — just in time.

We got our plan in place 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've had to make 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 down in January 2005.

Congress might consider making participation in any privatization plan voluntary at first. We made our plan voluntary in the beginning, and 70% joined. It later became mandatory. Now, there is full participation. Also, if there were some residual uncertainty about privatizing a portion of worker contributions, a plan could be devised in which low-income earners would be guaranteed the same funds they would get with total participation in Social Security.

Our experience has shown that even low-income workers would do better, but 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.

In today's debate about whether to partially privatize Social Security, the Galveston County plan is sometimes demagogued. But our experience should be judged factually and fairly, not emotionally, politically or on the basis of hearsay. We sought a secure, risk-free alternative to the Social Security system, and it has worked very well for nearly a quarter-century. Our retirees have prospered, and our working people have had the security of generous disability and accidental death benefits.

Most important, we didn't force our children and grandchildren to be unduly taxed and burdened for our retirement care while these fine young people are struggling to raise and provide for their own families.

What has been good for Galveston County may, indeed, be good for this country.

Judge Ray Holbrook was Galveston County judge from 1967 to 1995, and oversaw the creation and administration of the Galveston County alternative plan. Alcestis “Cooky” Oberg is on USA TODAY's board of contributors.

[Langston]

Mart - I don't think anyone that has done ANY amount of research on this would deny that the current Social Security system is failing and will be 100% insolvent very soon.

There are debates as to what is the proper "fix" for it... personal accounts is definitely one that I, personally, like and that seems to gather a lot of public support.

HOWEVER...

The Democrats are trying to turn people against it - using herd mentality and smoke and mirror tactics to try and forestall such a huge, positive change being carried out under their opponents administration. It's pathetic partisanship with the sole purpose of trying to make their own party look good at the expense of the people of this nation.

Right now, the Democrats have sunk to a new all-time low. They're scrambling for anything and everything that they think can potentially make them look better... and just as in the last election, they're failing miserably.

If they don't get their shit together soon, you won't see another Democrat in the Oval Office for some time.

[Martrae]

They're scaring the grey hairs and private accounts will be a pipe dream. Old people vote more than young so they don't care that they are screwing over the people this really affects.

And it's not just the dems...the reps are afraid to fight for this because they are afraid of losing their seats.

[Langston]

We'll see what happens... but I'll be very disappointed if some major overhaul is stopped because of the Democrats' partisanship for their own personal gain. The country needs this reform - and those idiots are more concerned with keeping their asses in office than they are doing what's right for the people who put them there.

It's disgusting.

[Lyion]

The AARP holds ludicrous power. Empowering more people would limit their strength in the future.

[Tossica]

Made in Texas? No thanks.

[Rust]

Personal accounts don't do a thing to fix the solvency issue of Social Security. In fact they require trillions of dollars to be borrowed to pay for it.

Raise the retirement age, uncap social security tax, cut benefits or raise the payroll tax a percent or so.

Just don't confuse people by claiming personal accounts will make the program solvent. They're two different issues.

--R.

[Martrae]

Did someone say that personal accounts would make it solvent? I musta missed that line.

Raising the age would go a long way to helping the problem, especially since life expectancy is longer, but you can bet the geezers won't go for that.

[Rust]

Did someone say that personal accounts would make it solvent? I musta missed that line.

Yeah, Ugzug said personal accounts were a 'fix' for an otherwise insolvent Social Security system.

Mart - I don't think anyone that has done ANY amount of research on this would deny that the current Social Security system is failing and will be 100% insolvent very soon.

There are debates as to what is the proper "fix" for it... personal accounts is definitely one that I, personally, like and that seems to gather a lot of public support.

Ugzug meant some kind of 'fix' that won't actually do anything about the solvency issue. I'll let him clarify.

--R.

[Rust]

Mart - I don't think anyone that has done ANY amount of research on this would deny that the current Social Security system is failing and will be 100% insolvent very soon.

As of March 2004, the CBO estimated that Social Security would be able to pay out 100% of benefits until 2052, and then 80% of benefits thereafter.

Maybe you could clarify what you meant by 'insolvent', since normally one would think 'insolvent' would mean 'broke' or something.

--D.

[Martrae]

Not sure where you got your info from...but apparently a couple months later they changed their minds.

Generally, when your outlay exceeds your revenue that's not a good thing.

[Rust]

Not sure where you got your info from...but apparently a couple months later they changed their minds.

Generally, when your outlay exceeds your revenue that's not a good thing.

The numbers I gave are from the exact same CBO document your diagram comes from. I would have assumed you read the document, since you copied the picture from it. I guess you didn't.

Here's the link. Your graph is on page 1, the timeline I cited is partway down page 2.

I don't think you understood what the graph is showing, np. It's easy to do.



--R.

[Lyion]

Planning on moving to the US soon, Rust?

[Langston]

Rust - we certainly would have to have some kind of dual program in place for some time to cover those who do not have the time to build up a personal account.

The issue of solvency is real and very serious. The main cause is because the overages that have existed in the past have been stolen by Congress to fund pork programs. The money that would be necessary to cover the outlays will NOT exist. If Congress were to pay Social Security back for the debts that have been incurred, we wouldn't be facing this crisis.

You can sit there with your head in the sand - you live in Canada and it doesn't affect you directly - you or your retirement planning. However, don't be spewing falsehood and misinformation to the Americans who need to educate themselves. We have >40% of our government already taking care of that.

[Rust]

Planning on moving to the US soon, Rust?

Lived there in 1994 and 1995. I do a lot of work there but I'm happy at home.

--R.

[Lyion]

What sort of retirement setup does Canada have?

[Rust]

Rust - we certainly would have to have some kind of dual program in place for some time to cover those who do not have the time to build up a personal account.

Right, but it's a distinct issue from solvency, and it poses a whole different set of issues on costs.

The issue of solvency is real and very serious. The main cause is because the overages that have existed in the past have been stolen by Congress to fund pork programs. The money that would be necessary to cover the outlays will NOT exist. If Congress were to pay Social Security back for the debts that have been incurred, we wouldn't be facing this crisis.

Splitting the SS Trust Fund out from general revenues would indeed have kept things tidier. I can't remember what year they stopped doing that, was it the 60's or the 70's?

You can sit there with your head in the sand - you live in Canada and it doesn't affect you directly - you or your retirement planning. However, don't be spewing falsehood and misinformation to the Americans who need to educate themselves. We have >40% of our government already taking care of that.

Well, so far I've pointed out that personal accounts do nothing to fix the solvency issue, and that the CBO's March 2004 projections point out the trust fund will be able to pay 100% benefits until 2052 and 80% thereafter.

Not sure how any of that is exactly controversial.

--R.

[Rust]

What sort of retirement setup does Canada have?

Well roughly it's parallel.

Company pensions are company pensions. Defined contribution or defined benefit.

Your IRA or 401(k), as I understand it, would be our RRSP - Registered Retirement Savings Plan. Basically put 18% of your income in a tax-free investment. I think they're lifting it to 22% this year. I don't know the equivalent limits in the US. You can take money out of your RRSP, but you pay taxes. You can also take money out temporarily to purchase a home, but you have to pay it back over some years, or else pay taxes.

Beyond that there's Old Age Pension Plan, which would more or less, I suspect be same to Social Security. I'm pretty sure OAP is pay-as-you-go too. I don't know the current base monthly benefit, but I wouldn't want to live on it alone, I suspect.

Edit: Is you have no other income, you get OAS plus GIS for about $1030 a month. GIS drops with increasing income. Like I said, not a lot.

Taxes are higher in Canada, funding OAP is not generally considered a looming issue here.

David Brooks in the NYT a couple days ago quite frankly commented (OpEd: 'A Requiem for Reform', NYT March 15, 2005):

Oh, yes, there's one more group to be criticized: the American voters. For the past 30 years, Americans have wanted high entitlement spending and low taxes. From the looks of things today, they - or more precisely their children - are going to live with the consequences.

--R.

[Captain Insano]

Fuck social security and old people. Cancel that shit altogether. If you are too stupid to plan for retirement I have a simple solution...


Run out of money and die of starvation. It will only take a month and save us all a lot of cash and trouble.

[Tikker]

Taxes are higher in Canada, funding OAP is not generally considered a looming issue here.

what are you, retarded?

When the baby boomers retire, there will be almost twice as many drawing OAP as those contributing to it

Maybe it's not an issue to you, but when they jack up my contribution rate, I know it will be an issue for me

[Rust]

Taxes are higher in Canada, funding OAP is not generally considered a looming issue here.

what are you, retarded?

When the baby boomers retire, there will be almost twice as many drawing OAP as those contributing to it

Maybe it's not an issue to you, but when they jack up my contribution rate, I know it will be an issue for me

Oh I expect when I retire I'll be means tested to no OAS. I'll have too much money.

I'm fine with that.

--R.

[Tikker]

You missed the whole point

when the geezers retire in the next 5 years, YOUR oap contributions will have to increase to fund THEIR oap

it has fuck all to do with what you may or may not end up collecting

[Langston]

Once again, Rust has found a single website that draws conclusions on partial data sets supporting his socialist opinion and then he stands before us with fingers planted firmly in his ears while he drones on... and on... and on.... and on.

You're a broken record, Rust... and it's the b-side of a no-name artist's record, at that.

[Rust]

Once again, Rust has found a single website that draws conclusions on partial data sets supporting his socialist opinion and then he stands before us with fingers planted firmly in his ears while he drones on... and on... and on.... and on.

You're a broken record, Rust... and it's the b-side of a no-name artist's record, at that.

The Congressional Budget Office?

For a slightly gloomier picture, the SSA Trustees say the Trust Fund will pay full benefits to 2042, and then 73% of full benefits thereafter.

The annual cost of Social Security benefits represents 4.3 percent of Gross Domestic Product (GDP) today and is projected to rise to 6.6 percent of GDP in 2078. The projected 75-year actuarial deficit in the combined Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds is 1.89 percent of taxable payroll, down slightly from 1.92 percent in last year's report. The program continues to fail our long-range test of close actuarial balance by a wide margin. Projected OASDI tax income will begin to fall short of outlays in 2018 and will be sufficient to finance only 73 percent of scheduled annual benefits by 2042, when the combined OASDI trust fund is projected to be exhausted.

Nobody's 'insolvent'. Benefits will continue even if nothing is done, just at a lower level.

--R.

[Rust]

You missed the whole point

when the geezers retire in the next 5 years, YOUR oap contributions will have to increase to fund THEIR oap

it has fuck all to do with what you may or may not end up collecting

I'm fine with that too. I make good money, I'm not greedy. OAP is one of the least objectionable programs the government *has*. I have no problem with means testing those of us making over 100k like me.

I should have said 'it's not viewed as a crisis issue as it is in the US'. I'm sure the goverment will do something to keep paying benefits.

--R.