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Friday, March 04, 2005

Galveston, Texas

Posted by: Hammer / 3:00 PM

Update: March 4, 3:00 p.m. House member Pete Sessions (R-TX) invokes the Galveston misdirection in the Dallas Morning News: "Anticipating future cuts to Social Security, Galveston County employees voted overwhelmingly in 1981 to opt out of Social Security and create an alternative plan at virtually no risk to beneficiaries. This alternative plan pools employee money and lends it to a top-rate financial institution in return for guaranteed rates. Annual returns average 8 percent a year.

Americans work hard for their retirement, and they deserve the option to choose personal retirement accounts based on successful models. Galveston County employees adopted a safe and effective retirement plan. Likewise, all Americans deserve access to a proven model – one that's as safe as money in the bank."

Used to be only two things came from Texas. Boy, howdy, we liked it that way. With Texans firmly entrenched in power within the GOP -- including such fine folks as John Kline, the Texan representative for Minnesota's second congressional district -- every bad idea Texas Republicans have had in the last 20 years is set to be unleashed upon an unsuspecting nation.

Enter Galveston County, Texas (map). We'll let Big Gil Gutknecht explain Galveston's significance:

In 1981, the employees of Galveston County, Texas, voted to leave the Social Security System and divert their payroll taxes to personal accounts. According to the National Center for Policy Analysis, a nonpartisan public policy research organization devoted to developing private alternatives to government regulation and control, the costs of Galveston County's retirement plan are essentially the same as the Social Security system's costs; however, the benefits are much greater.

For example, a Galveston County retiree who worked for 40 years with an annual salary of $30,000 would receive around $2,400 a month for retirement, while that same county employee would have received just $1,077 from Social Security. Galveston County employees are averaging returns of 7.5 to 8 percent while Social Security returns averaged about 2 percent. On top of this, the county has been able to provide a life insurance benefit, which Social Security does not offer, and disability insurance that is superior to Social Security's disability program.

That's the basic pitch: Galveston County employees opted out of the retirement in 1981. Since then, they have: These claims have been reduced to talking points and distributed far and wide. For example, GOP USA:
The results have exceeded all expectations. In some years, the guaranteed minimum annual return has been as high as 12 percent; it has averaged 6.5 percent since 1981. Under current projections, a 40-year-old middle manager will receive $5,474 a month upon retirement. Under Social Security, he would have received $1,042.

What about death and disability benefits? While Social Security pays an insulting one-time death benefit of $255 -- less than the cost of a pine box -- the private plan pays triple the worker's salary up to $150,000, with a guaranteed minimum of $50,000.

There's this letter to the editor, which could be the start of an Astroturf campaign:
The Galveston plan has been a success. Since 1981, more than 5,000 retirees in the three counties have enjoyed market retirement yields averaging 7.5 percent compared to less than 2 percent under Social Security.
It's easy to pick apart these arguments. For example, conservatives never mention that the Galveston plan costs more: 13.9% of total income instead of 12.4% of income up to $90,000.

To sell the vaunted Galveston death benefit, conservatives also have to ignore the survivor benefits available under Social Security. And, when three writers have 3 different figures for the Galveston rate of return (8%, 7.5%, 6.5%), you can be certain that the numbers are cherry picked. As always, the rate of return assumes no responsibility to pay current benefits. The Social Security system would pay me a lot more in 40 years if we just stopped paying current retirees any benefits.

Here at 3WN, we oppose the idea of canceling benefits to all current retirees.

I was all set to go on like that, picking apart the Galveston plan, especially after the story made its way across the pond. The Guardian UK headline "Pensions and penury: the Galveston experiment prepares to go national" convinced me that this was a story that wouldn't go away.

The story won't go away, but -- and this but is Rikiski big – the story is very different from what I imagined.Investor's Business Daily reports:

Government workers in the Texas counties of Galveston, Brazoria and Matagorda decided to forgo Social Security in favor of private investment accounts in the early 1980s, and some say they're faring better as a result. …

Private-account proponents are eyeing these three small Texas counties as a living example of what a private model could look like. The only thing is, these accounts are vastly different than most currently-proposed reforms.

Whether retirees' are better or worse off under the Alternate Plan than they would have been under Social Security -- a point over which there is some debate -- they're enjoying a profoundly different type of private account than is currently touted by some lawmakers.

Under the Alternate Plan, workers' money is not invested directly in the stock market, but solely in annuities, earning an interest rate which adjusts each quarter but never drops below a minimum of 4 percent, a rate that's guaranteed by the insurance companies holding the annuities. …

"If I were to give President Bush any advice," investment manager Gornto said, "the one thing I would suggest is to set up the new alternate plans on a banking model rather than a market model." …

Under the Texas plan, the minimum 4 percent return (before inflation) is guaranteed, but workers don't control how their money is invested: It all goes into annuities. …

Workers pay 6.1 percent of their earnings into a private account, similar to the 6.2 percent other U.S. workers pay to Social Security.

Their employers toss in about 7.7 percent (the three counties' rates vary slightly) compared with the 6.2 percent other employers pay to the traditional system.

While middle and higher income workers appear to reap higher benefits in retirement under the Texas plan than under the traditional Social Security system, lower income workers may end up short. …

A key difference between the Alternate Plan model and Social Security is that lower-income workers are better protected under the current retirement system. …

The GAO found that a low-income worker averaging about $17,120 annually would collect $617 in initial monthly benefits under the Alternate Plan, vs. $750 from Social Security. …

Still, the GAO report agreed that middle- and high-income earners would do better under the Alternate Plan. …

Survivor benefits, however, may be more limited under the Alternate Plan. If a worker dies before retirement, the Alternate Plan provides his heirs a lump-sum benefit of four times the worker's salary, with the minimum benefit starting at $75,000 and maxing out at $215,000, no matter how many dependents the worker has.

Social Security provides a survivor benefit to each minor child, so the more children in a family, the more likely the total Social Security pay-out will exceed that offered by the Alternate Plan.

For instance, looking at a low-wage worker who dies at age 45, the GAO found the surviving spouse with two dependent children would collect $1,602 per month from Social Security, but just $831 per month under the Alternate Plan after annuitizing the lump-sum benefit.

In other words, I missed the point entirely. The Galveston plan, which may have merits worth considering in an honest debate, has nothing to do with the administration's plan. The Bush plan is private investments in conservative equity accounts. It's supposed to be about choice. The Galveston plan doesn't have choice or direct equity investments. In Galveston, the money is loaned to investors. Those investors put the money wherever they see fit and pay a guaranteed 4% return on the loan. To date, the investors have generally fared well and have returned more than the minimum. Good for the county employees of Galveston, but shame on the Social Security privatizers who point to Galveston as a model while backing an entirely different plan.

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