CRITICS OF REFORMING SOCIAL SECURITY are using scare tactics to
argue that allowing workers to use some of their payroll taxes to
set up personal retirement accounts will expose them to
unpredictable stock market risks. But there are real-world examples
showing that doesn’t have to happen, from the retirement programs
set up for federal employees to an innovative Texas plan that has
outperformed Social Security without undue risk. The Texas program
is worth a close look because it now has a track record of nearly a
quarter century of consistent results.
In 1980, 72 % of municipal employees in Galveston County, Texas,
approved creation of a privately funded retirement plan that also
included life insurance and disability components similar to Social
Security. Over the next two years, Brazoria and Matagorda counties
joined Galveston’s plan. At the time, local governments could opt
out of the Social Security system if they provided an alternative
retirement plan (that loophole was closed in 1983).
Galveston’s plan has been a success on every level. Since 1981,
over 5,000 retirees in the three counties have enjoyed market
retirement yields averaging 7.5 %, compared to less than 2 % under
Social Security. Here’s how the Galveston Plan works: Workers’
payroll taxes are deposited in personal retirement accounts that
are then used to purchase commercial banking and life insurance
products, such as certificates of deposit and annuities, as well as
conservative government and commercial bonds. Former Galveston
County Judge Roy Holbrook, who helped implement the idea, says
workers backed it “because it essentially eliminated risk from the
program.”
“Our plan provides better retirement, survivorship and
disability benefits than Social Security,” says Mr. Holbrook. “And
our plan uses no risky investments, only commercial banking
products, annuities and bonds that provide guaranteed fixed
interest rates and no risk.” And unlike Social Security, the
Galveston Plan accounts are individually owned, and accumulated
savings can be passed on to heirs.
THAT MAKES A HUGE DIFFERENCE in individual lives. When a Galveston
county commissioner died in 2001, his widow received a $255 death
benefit from Social Security — and nothing else. The Galveston
Plan, however, paid her a lump-sum survivorship benefit of
$150,000, plus she is entitled to a reserve account of $125,000,
available to her at any time. Her benefits are more than 1,000
times better than what Social Security offered.
The actual retirement benefits of participants in the Galveston
plan also outstrip Social Security. Someone earning $51,000 a year
would retire with a lifetime income of $3,800 a month or roughly 90
% of their pre-retirement income. That compares to the $1,500 a
month (36 % of pre-retirement income) they would get under Social
Security.
The program also benefits lower-income workers. A worker with an
annual income of $18,000 takes in some $1,400 a month from the
Galveston plan — 90 % of his pre-retirement level. That same
person would get only $782 a month (54.8 % of his pre-retirement
earnings) from Social Security.
The Galveston plan began in 1979 when County Attorney Bill
Decker began thinking about a substitute for Social Security, which
was then teetering on the verge of bankruptcy. Don Kebodeaux and
Rick Gornto, two successful Houston businessmen, took up the
challenge and formed the First Financial Group.
THE LOCAL UNIONS FOUGHT THE IDEA at first, as did several local
officials. But after county employees endorsed the concept by 3 to
1, opposition melted away and disappeared completely as the higher
returns rolled in. Mr. Decker, now retired, likes to say that he
has been approached by county employees who voted against the plan
but now want to thank him for his far-sighted vision.
Other jurisdictions took note of Galveston’s innovation and
began planning to emulate it. Over 200 other counties, as well as
many cities, entered into discussions with First Financial Group
about joining the plan. Then Congress intervened and killed
expansion of the idea as part of its 1983 plan to rescue Social
Security from bankruptcy.
Legislators had already decided to dragoon all federal employees
into the Social Security system when they discovered that hundreds
of thousands of county and city workers around the country were
preparing to leave and set up versions of the Galveston plan.
Congress swiftly closed the barn door and canceled the opt-out for
local governments in 1983. Fortunately, Galveston, Brazoria, and
Matagorda counties were allowed to continue their plans under a
grandfather clause.
The Galveston Plan isn’t the only example of local and state
governments running superior retirement systems outside of Social
Security. Five states — California, Nevada, Maine, Ohio, and
Colorado — run their own retirement plans, as do many local police
and fire departments. All of these plans show what Americans can do
to create better and more flexible retirement systems if they are
left alone to innovate.
“It’s time for the rest of us to follow the 25-year- old example
of Galveston, and get back to the future,” says Steve Forbes, the
publisher of Forbes magazine. “Personal retirement
accounts such as those proposed by President Bush will give every
American the opportunity to secure some of the benefits people in
three Texas counties enjoy.”
