Galveston County, Texas, is no longer famous solely for the hurricane that devastated the area killing an estimated 8,000 people in September 1908, the deadliest natural disaster ever to strike the US. Now the county is cited as an alternative ‘Texas’ model for fixing Social Security.
Presidential candidate and Texas Governor Rick Perry drew national attention to Galveston when he described Social Security as a “Ponzi scheme” and praised the three Texas counties that opted out in 1981: Matagorda and Brazoria, besides Galveston, the most important of the three. “People in Texas are very independent. They stepped out and challenged the system,” explained Rick Gornto to the Texas Tribune newspaper, which went there to report on the local scheme called the ‘alternate plan’.
Gornto designed it and is the president of First Financial Benefits, the company that manages the retirement accounts. It is not possible to follow their example today because the exemption that allowed municipal governments to form their own alternative retirement plans was eliminated in 1983. But the discussion about their motives and the outcomes is very much alive and kicking as the US debates Social Security reform.
“When I was county judge in 1979, many county workers were concerned about the soundness of Social Security, as many people are today,” says the retired Galveston County Judge Ray Holbrook. “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’.
The alternate plan works like private individual saving accounts: employees contribute 6.1% of their gross pay, with the county contributing 7.8%, more or less as with the Social Security. First Financial Benefits invests the accounts conservatively, through external money managers who guarantee a minimum annual interest rate, currently 3.75%. At the end of 2010 the plan had $62.1m (€39.7m) assets, managed mostly by American United Life, an insurance company based in Austin, Texas.
Over the last decade, the accounts have earned an average 5% per year. At retirement, employees can choose to take the money in a lump sum, monthly benefits for a predetermined time, or a lifetime annuity. The plan also offers disability and life insurance. The system was voluntary at the beginning, when 70% adopted it, although it later became mandatory. It has around 1,500 participants. First Financial Benefits has calculated the following level of benefits based on 40 years of contributions: $1,826 a month for a lower-middle-income worker making an annual salary of about $26,000, versus $1,007 under Social Security; $3,600 for a middle-income worker making $51,200 versus $1,540 monthly from Social Security; and $5,000-6,000 a month for a high-income worker who maxed out on his Social Security contribution every year, instead of about $2,500 a month from Social Security.
However, many Galveston County retirees took advantage of the option to withdraw money from their accounts, so benefits were reduced - that option was withdrawn in 2005. Another problem is that if retirees do not choose a lifetime annuity, they could outlive their benefits: Gornto and Holbrook advised lawmakers who want to copy the Texas model to remove the option to take out a lump sum.
But could the alternate plan really become the model for reforming Social Security nationally? Yes, says Merrill Matthews, a resident scholar with the Institute for Policy Innovation in Dallas. But Democrats and the President Barack Obama do not even want to discuss any privatisation of Social Security.
Apart from in these Texas counties, only the Amish of the ‘Old Order’ Christian communities have succeeded in staying out of the Social Security system. Their religion does not allow buying insurance plans. They believe in taking care of themselves and do not take advantage of any government-sponsored programmes, including Medicare and unemployment benefit. Because Social Security is called old age, survivors, and disability insurance, the Amish obtained an exemption by President Lyndon B Johnson in 1965.