Social Security Alternative Already Working in Texas

By Jeff Johnson | July 7, 2008 | 8:22 PM EDT

( - The personal retirement plan sketched out in President Bush's State of the Union Address has been universally derided by Democrats as an unworkable privatization of the retirement program.

"As we fix Social Security, we also have the responsibility to make the system a better deal for younger workers, and the best way to reach that goal is through voluntary personal retirement accounts," Bush said during the address Wednesday night.

"Here is how the idea works: Right now, a set portion of the money you earn is taken out of your paycheck to pay for the Social Security benefits of today's retirees," Bush explained. "If you're a younger worker, I believe you should be able to set aside part of that money in your own retirement account, so you can build a nest egg for your own future."

President Bush warned the nation that 13 years from now -- in 2018 -- Social Security will start paying out more than it takes in. He also had a message for Americans 55 and older: "Do not let anyone mislead you;" he said: "For you, the Social Security system will not change in any way. For younger workers, the Social Security system has serious problems that will grow worse with time."

Senate Minority Leader Harry Reid (D-Nev.) said on Wednesday that all 44 Senate Democrats were united against the president's plan to reform Social Security. Without knowing any details, Reid told reporters, "President Bush should forget about privatizing Social Security," adding, "It will not happen."

But privatized Social Security has been a fact of life for municipal employees in Galveston County, Texas, for nearly a quarter century. Local government workers voted overwhelmingly in 1981 to opt-out of Social Security in favor of a locally controlled system that has since been widely described as a phenomenal success.

Under federal law at the time, municipal workers had the option of not participating in the Social Security program, replacing it with private retirement accounts. The private system is subject to regular payroll deductions and employer matches, essentially mirroring Social Security tax withholding and employer match provisions.

"There are a number of [county employees] that are strong advocates and say it's really a very, very good, solid, strong, financially and fiscally strong program that is for the benefit of county employees far in excess of what Social Security would be," Galveston County Legal Department Director Harvey Bazaman told Cybercast News Service.

Under Galveston's "Alternate Plan," the county withholds approximately six percent of each employee's salary for retirement. That money, along with a partial match by the county, is invested in personal accounts for each participating employee. The remaining county match covers the cost of disability and life insurance policies for employees, which also pay benefits much higher than those offered by Social Security.

While the employee-employer funding formulas are nearly identical under both Social Security and the Galveston Alternate Plan, the results are very different.

The U.S. Treasury Bonds purchased with money from the Social Security "trust fund" pay approximately two percent. But for the period from 1982 through 1997 the rate of return on funds invested in the Galveston plan has averaged 8.6 percent, a return more than 400 percent greater than Social Security.

Data from First Financial Benefits, which administers the Galveston Alternate Plan, shows that county workers earning slightly more than $17,000 a year can retire at age 65 with a monthly payment of $1,285 compared with $782 a month under Social Security.

Due to having more money withheld and the effects of compounding interest, higher income employees in Galveston see even larger benefits under the Alternate Plan. Workers earning $51,263 a year could retire at 65 with a monthly benefit of $3,846, while the same worker participating in Social Security would receive $1,540 each month.

Even the relatively low "guaranteed rate of return" in the Galveston plan roughly doubles the rate of return for Social Security. Funds already invested in annuities have a guaranteed yield of 3.75 percent, according to Bazaman. As for money being placed into private accounts today, Bazaman said the rate is slightly higher at 4.24 percent.

"They have never lost money. They have gone through double recessions in the 1980s, recessions in the 90s, and a tech boom and bust in the 1990s and into 2000," said Charles Jarvis, chairman and CEO of USA Next-United Seniors. "They've gone through another recession, an attack on this country and wars in Afghanistan and Iraq, yet they have steadily provided income for people."

The Galveston County, Texas Alternate Plan enacted in 1981 with the approval of 78 percent of local employees proved popular locally. By 1983, local government workers in three nearby municipalities -- Brazoria and Matagorda Counties, and Texas City -- also voted to quit Social Security in favor of private retirement plans.

Amid growing enthusiasm for an alternative to Social Security, the Democrat-controlled Congress voted in 1983 to end the provisions giving municipal workers the option to leave the federal system.

The Social Security Administration estimates that, nationwide, seven million public employees opted out of the federal retirement plan before Congress eliminated that choice. Those employees' combined annual incomes for 1999 totaled $129 billion. Based on that figure, and including estimated employer matching funds, those public employees invested approximately $17 billion in variations of private retirement accounts that year rather than in Social Security.

In testimony before the President's Commission on Social Security in 2001, former Galveston County Judge Ray Holbrook relayed the story of a county commissioner who died in office.

According to Holbrook, the commissioner's widow received a $255 death benefit from Social Security. But under the Galveston Alternate Plan, she also received a lump-sum survivor's benefit of $150,000 and was entitled to her late-husband's $125,000 reserve account.

Holbrook's anecdote underscores another aspect touted by backers of private accounts -- that the money paid into them is the private property of the employee. As a result, private retirement account funds are passed on to an employee's heirs upon his or her death, unlike unpaid Social Security benefits, which are forfeited to the government.

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