A model for Social Security reform
Posted: Thu Mar 17, 2005 4:46 pm
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.
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.
