SOCIAL SECURITY: IT'S NOT WHAT YOU THINK

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One of the hot potato issues in the recent campaign and election was what to do about social security. As politicos will do, the issue was frequently portrayed much differently during the campaign than it is being portrayed now. We all should know by now that our elected leaders actually are paying attention to the blogging phenomenon. So what do you think? Is Social Security fixable? Does it just need a bit of tweaking or a major overhaul? Do you feel secure that Social Security will be there for you? Do you care?

Requesting that the discussion be kept cordial with a minimum of insults please.

Social Security deceit

http://www.NewsAndOpinion.com | President Bush's call to allow Americans to take a portion of the money they pay as Social Security taxes to set up private retirement accounts has to be a good idea. Why? The more of what a person earns that's in his pocket and under his control, the better off he will be. At a later date, when the details of the president's plans are known, I'll address the various reform plans under debate. For now, let's look at some of the gross political deceit, lies and unkept promises that have become a part of Social Security.

Here's what a 1936 government Social Security pamphlet said: "After the first 3 years ?- that is to say, beginning in 1940 ?- you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year. ... Beginning in 1943, you will pay 2 cents, and so will your employer, for every dollar you earn for the next 3 years. ... And finally, beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. ... That is the most you will ever pay."

Had Congress lived up to those promises, where $3,000 was the maximum earnings subject to Social Security tax, controlling for inflation, today's $50,000-a-year wage earner would pay about $700 in Social Security taxes, as opposed to the more than $3,000 that he pays today.

The next big lie is from the same Social Security pamphlet: "Beginning November 24, 1936, the United States government will set up a Social Security account for you. ... The checks will come to you as a right." First, there's no Social Security account containing your money, but more importantly, the U.S. Supreme Court has ruled on two occasions that Americans have no legal right to Social Security payments.

In Helvering v. Davis (1937), the court held that Social Security was not an insurance program, saying, "The proceeds of both (employee and employer) taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way."

In a later decision, Flemming v. Nestor (1960), the court said, "To engraft upon Social Security system a concept of 'accrued property rights' would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands ... " That flexibility and boldness mean Congress can constitutionally cut benefits, raise retirement age, raise Social Security taxes and do anything it wishes, including eliminating payments.

If a private retirement company reneged on its promises, we could take it to court. If Congress reneges on its promises, there's no judicial course of action whatsoever.

Vital to any Ponzi scheme, like Social Security, is the ability to recruit as many suckers as possible. In 1999, a little noticed part of President Clinton's plan to "save" Social Security was to force 5 million previously exempted employees into Social Security. If they were forced into Social Security, it would have created billions in additional revenue. Guess what. Twelve senators, including five Democrats ?- Dianne Feinstein (D-Calif.), Barbara Boxer (D-Calif.), Christopher Dodd (D-Conn.), Richard Durbin (D-Ill.) and Edward Kennedy (D-Mass.) ?- descended on the White House to demand that President Clinton not support forcing 5 million of their constituents into Social Security. They warned of the adverse impact on employees in terms of lower rates of return and lost flexibility.

Isn't that great? These are the same politicians who are now resisting President Bush's call to allow Americans to take a part of their Social Security taxes to put into private retirement accounts. If they'd go to bat for those 5 million workers to remain out of Social Security, to avoid the adverse impact of lower rates of return and lost flexibility, why would they fight to deny tens of millions of workers a right to use a portion of their taxes to do the same? --Walter Williams
http://www.jewishworldreview.com/cols/williams022305.asp

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Re: SOCIAL SECURITY: IT'S NOT WHAT YOU THINK

Walter Williams wrote:

In Helvering v. Davis (1937), the court held that Social Security was not an insurance program, saying, "The proceeds of both (employee and employer) taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way."

This distorts the ruling in Helvering v. Davis. The supreme court said nothing about insurance. The fact that social security taxes are not earmarked in no way means that social security, as a program, doesn't bear many of the attributes of an insurance program.

Walter Williams wrote:

In a later decision, Flemming v. Nestor (1960), the court said, "To engraft upon Social Security system a concept of 'accrued property rights' would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands ... " That flexibility and boldness mean Congress can constitutionally cut benefits, raise retirement age, raise Social Security taxes and do anything it wishes, including eliminating payments.

Of course. That's because no one has any accrued property rights in social security.

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Good points Joe, though I've been reading Williams for some years now and he frequently uses figurative rather than literal language in his examples. I think the point he is making is the government gave us social security, and there is no law that exists that prevents them from voting it out of existance tomorrow. For those who depend heavily on it for some or all of their retirement income, that's a kind of scary thing to think about.

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The logical crux of this article appears to be:

Quote:

If a private retirement company reneged on its promises, we could take it to court. If Congress reneges on its promises, there's no judicial course of action whatsoever.

Is this responsive to the problem? Is the problem that we don't have a judicially enforceable right to government entitlements? The author appears to subscribe to two questionable premises:

1. A private account system would lead to an enforceable property right.

This is an impossible assertion without the exact details of the proposed reform. Even with the details, the fate of this in court would be difficult to predict. Moreover, it would still be subject to government tinkering; that the government is acting through private intermediaries is not as important as the author implies. The system must, ultimately, still be funded by government money.

2. An enforceable property right would somehow make the system solvent.

Huh? What does this mean?-that private lawsuits will force the government to add money to the system? That's a bad solution, fraught with transaction costs and possibly separation of powers issues. Do we expect courts to issue injunctions to Congress forcing appropriations? Or is the solution that we sue the private firms when they're underfunded?

I might support Bush's plan--and I've expressed some support for private accounts in other threads--but I'd need to see the full proposal before making my final conclusion. I find the above argument totally uncompelling and unresponsive to the problem at hand?-the solvency of the program.

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Steppenwolf, by the 'above argument', do you mean Williams' essay? I don't think he was offering a solution in this particular piece though he may well have done so in other ones at a different time. Here he is rather making the case of how tenuous the social security system is, how government in the past has failed to keep its promises regarding it and/or has been disingenous even now when using it as a political football. We are paying a huge chunk of our income into the system with zero guarantees that we will get anything back. In my opinion, it is this that Williams is addressing.

I read also that he is reserving comment and opinion on how the system might be privatized, and I did get the impression he thought that to be the way to go. (Williams is Libertarian and holds to the Lockean principles of private ownership as the only defense from an opportunistic government.)

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For those who wonder how privatized social security might work, here is one explanation though it is based on old data. (I'm trying to see how those counties are doing now.)

http://www.public-policy.org/~ncpa/ba/gif/ba215a.gif

NATIONAL CENTER FOR POLICY ANALYSIS

Some Americans Already Have Privatized Social Security

BRIEF ANALYSIS
No. 215
For immediate release:
Monday, November 4, 1996

From the inception of Social Security in 1935, its proponents have encouraged Americans to think of it as a type of private pension plan. Now most people realize that the Social Security Trust Funds are trust funds in name only and consist of nothing more than IOUs the government owes to itself. Various polls show most Americans are skeptical that Social Security will be there when they retire.
However, employees of three Texas counties that opted out of the Social Security program more than a decade ago are earning an average 6.5 percent interest, compounded daily, on their vested personal retirement accounts.

Can a privatized Social Security system work? It already does. Let's see how.

How the Social Security System Works. Currently, employers and employees each pay 6.2 percent (a total of 12.4 percent) of an employee's income into the Old Age, Survivors and Disability (OASDI) program for retirement benefits. This does not include the 1.45 percent payroll tax employers and employees each pay to fund Medicare's Hospital Insurance program.

In general, individuals must contribute for a minimum of 40 quarters (10 years) to receive Social Security retirement benefits, or 20 quarters to receive disability benefits. In return for these contributions, individuals generally can expect:

A monthly check after retirement, with the average check being $697 in December 1994.

A monthly check for a qualified disability until the recipient returns to work or reaches retirement age.
In addition, a surviving spouse receives a monthly benefit equal to 100 percent of the deceased spouse's basic benefit and surviving children under the age of 18 each receive an amount equal to three-fourths of the deceased parent's benefit.

Social Security's Financial Crisis. Social Security is a pay-as-you-go system under which taxes collected from current workers are used to pay current retirees. That was sustainable in the past. For example, in 1950 there were 16 workers providing benefits for each retiree. However, today the ratio has dropped to 3.3 workers for each retiree, and by the year 2030 the ratio will be less than 2 to 1.

The demographic changes and the pro-gram's expansion have driven the Social Security tax rate up from 2 percent (1 percent each from employer and employee) initially to 12.4 percent today, and the maximum wage subject to taxation has risen from $3,000 to $62,700. As a result, the ratio of benefits to taxes for today's workers has dropped significantly. The Social Security Administration estimates that those born in 1877 (and retiring in 1942) got an average of 36.5 percent real rate of return on their Social Security contributions, while those born in 1950 will receive on average just a 2.2 percent return, and those born in 1975 will get a 1.8 percent return. Future workers will get an even worse deal.

Everyone recognizes that this trend is unsustainable. According to the latest report from the Board of Trustees of the Social Security Trust Funds:

Social Security tax revenues will be insufficient to pay current benefits as early as the year 2012.

By the year 2029, Social Security outlays will have completely exhausted the trust funds, and current revenues will fall short of expenditures by about 2 percent of gross domestic product (GDP) annually.

In order to make the payments without cutting benefits, the Trustees estimate that payroll taxes will have to rise from the current 12.4 percent to 18.8 percent.
A Private Retirement Plan That Works. The initial Social Security Act permitted municipal governments to opt out of the system - a loophole that Congress closed in 1983. In 1981, employees of Galveston County, Texas, chose by a vote of 78 percent to 22 percent to leave Social Security for a private alternative. Brazoria and Matagorda counties soon followed, swelling the private plan to more than 5,000 participants today. In the private plan, contributions are similar to those for Social Security but returns are quite different.

Initially, employees and their employer were each required to contribute 6.13 percent of income; recently, the counties increased their contribution to 7.65 percent - for a total contribution of 13.78 percent.

Of that 13.78 percent, 9.737 percent goes to the employee's individual retirement account, which pays a 6.5 percent average interest rate, compounded daily.

The remainder pays for disability and life insurance premiums to cover the employee in case of an accident or death.

Workers continue to pay their Medicare payroll taxes and to receive Medicare benefits upon retirement.
But while the cost of the private program, known as the Alternate Plan, is virtually the same to the employee and employer as Social Security, the benefits are far greater. According to First Financial Benefits, Inc., which created and administers the plans:

A person retiring today at age 65 with 40 years of deposits and an annual salary of $20,000 would retire with $383,032 in a personal account.

Someone with a $30,000 salary for 40 years would retire with $573,782.

And a person with a $50,000 salary for 40 years would retire with $956,303.
A personal retirement account this size provides a much larger postretirement income than does Social Security. Moreover, retirees under the Alternate Plan have a number of options not available to retirees under Social Security. For example, those with the Alternate Plan can choose among several annuities or take their money in a lump sum. As the figure shows, under one option:

A retired $20,000-per-year worker with the personal retirement account would receive $2,740 each month at current interest rates, while Social Security benefits would be about $775 per month.

A $50,000 per year worker would receive $6,843 from the private plan, compared to $1,302 from Social Security.
In addition, the employer's contribution pays for much more generous benefits than those provided by Social Security.

The life insurance benefit is three times the worker's salary (with a minimum benefit of $50,000 and a maximum of $150,000); Social Security, by contrast, pays a one-time death benefit of $255 to a surviving spouse.

Disability insurance under the Alternate Plan pays 60 percent of an individual's salary until age 65 or until the individual returns to work and is relatively easy to qualify for, while Social Security disability benefits can be very difficult to qualify for and are unavailable to young workers who have not yet worked the required amount of time.
Is the Program Safe? One of the biggest challenges to privatizing Social Security is to ensure the safety of the contributors' investments. Workers under the Alternate Plan are required to make their payroll contributions, and the money is invested in annuities with a highly rated insurance company. Though the interest rate can fluctuate from year to year, the financial institution that invests the money must pay a guaranteed interest rate for that year.

Conclusion. Employees of three Texas counties are enjoying rapid growth in their retirement incomes, better benefits than those offered by Social Security and the satisfaction of knowing that the money deposited in their accounts belongs to them and will be there when they retire. Privatizing Social Security is not a distant dream; for some Americans it is a present reality. Fairness and true social security demand that all Americans have the same opportunity.

This Brief Analysis was prepared by NCPA Vice President of Domestic Policy Merrill Matthews Jr.

http://www.ncpa.org/ba/ba215.html

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http://www.nytimes.com/2005/03/02/politics/02social.html

March 2, 2005
NEWS ANALYSIS
For President's Social Security Proposal, Many Hurdles
By RICHARD W. STEVENSON

WASHINGTON, March 1 - President Bush's drive to overhaul Social Security is in trouble, and while it is far too soon to declare it doomed, it faces obstacles on all sides.

After a week at home listening to constituents on the issue, Congressional leaders of Mr. Bush's own party have returned to Washington and immediately begun playing for time, suggesting that they may not meet his goal of passing legislation this year.

Democrats, apparently feeling little political pressure to come up with a plan of their own or work across the aisle, remain remarkably united against the main element of Mr. Bush's plan: his call for private investment accounts to be carved out of Social Security payroll taxes.
A USA Today/CNN/Gallup poll published Tuesday showed Mr. Bush receiving his lowest marks on the handling of Social Security since becoming president.

Perhaps most difficult of all for the White House, members of Congress have little sense that voters are demanding that they confront the issue now and make difficult choices that are bound to have political repercussions.

Contrary to the broad-based support that drove the last bipartisan action to overhaul an entitlement program - the addition of a prescription drug benefit to Medicare - the public has not been clamoring for a new approach to Social Security or for confronting the painful steps necessary to meet Mr. Bush's goal of ensuring its permanent solvency.

Indeed, there is no consensus even among Republicans about how to proceed. They are divided, in some cases bitterly, over issues like how big the private accounts should be, whether the nation can afford to borrow trillions of dollars to establish them and whether a tax increase can be part of any solution.

"When a boat springs so many leaks, it only floats for so long," said Tony Fabrizio, a Republican pollster, who declared that Mr. Bush was losing the momentum he had picked up after making Social Security the centerpiece of his State of the Union address. "The Democrats have certainly shot holes in it, but the Republicans have also been shooting holes."

Robert Bixby, executive director of the Concord Coalition, a group that advocates balanced budgets and bringing Social Security's promised benefits into line with what it will be able to pay, said the chances that legislation would emerge from Congress this year now appeared slim.
"The political dynamics just don't seem to be there to achieve a meaningful Social Security reform this year," Mr. Bixby said.
White House officials said Tuesday that the president's goal of getting legislation enacted this year was still achievable. But on Capitol Hill, Republican leaders, while maintaining their support for Mr. Bush's approach, appeared intent on dampening expectations of quick action and easing the anxiety within their ranks.

Asked if it was a certainty that Social Security legislation would reach the Senate floor this year, the Republican leader, Bill Frist of Tennessee, said the "pacing" of that legislation would be "determined by the American people," and added, "In terms of whether it will be a week, a month, six months or a year as to when we bring something to the floor, it's just too early."

But to some proponents of taking action along the lines of what Mr. Bush has proposed, the chances of getting something done at all are receding, hurt by missteps and political posturing on all sides.

Charles W. Stenholm, a Texan who was among a handful of Democrats to support private accounts before he lost his House seat last year, said both parties were to blame for not creating an atmosphere in which a deal could be worked out.

"Where we are right now is in deep trouble," Mr. Stenholm said. "The problems associated with the future of Social Security for our grandchildren are still there, but we seem to be even farther away from a bipartisan solution. It's obvious the game plan the administration chose is not working."

Mr. Bush has been telling audiences that the politics of Social Security have changed, that the appeal of personal investment accounts and what he describes as the urgency of acting before the baby boom generation retires have combined to outweigh the costs, political and economic, of doing nothing.

Some Republicans appear unconvinced. After their weeklong recess hearing citizens' complaints and seeing the organized opposition to private accounts, many Republicans returned with a warning that if Mr. Bush wanted action this year, he would have to do much more to convince the nation that Social Security's projected financial gap required immediate, bipartisan legislation.

The White House promised on Tuesday that Mr. Bush planned to do just that. Administration officials said the president, cabinet secretaries and other aides would blanket the country in coming weeks, redoubling their efforts to generate support for Mr. Bush's proposal.

The officials said they would seek to get across a variety of messages: that older people, a potent voting bloc that tends to be suspicious of any changes to the retirement system, have nothing to fear; that younger workers will get a better deal from private investment accounts than if the solution to Social Security's long-term problems is limited to benefit cuts and tax increases; that doing nothing will inevitably lead to big tax increases or benefit cuts; and that Democrats in states where Mr. Bush is popular will run a political risk if they defy him.

Noting that it had been only a month since the State of the Union speech, Nicolle Devenish, the White House communications director, said: "If you look at what the president has been able to do in terms of elevating the issue, explaining a program riddled with terms like 'bend points' that are hard for busy families to wrap their brains around, the intensity with which we have engaged in the public campaign and the legislative process, we feel good about where we are. But we recognize there is much more to be done."

Asked what Mr. Bush intended to do to keep the issue moving forward and bring some Democrats to his side, Ms Devenish said: "The president believes that once everyone has coalesced around the belief that there's a problem that has to be addressed, it will be something that invigorates members of both parties. Without the understanding and acceptance among the American public that we have to act now to strengthen Social Security, it will be very difficult to get to that point."

Representative Tom DeLay of Texas, the House majority leader, said he disagreed with another Republican, Charles E. Grassley of Iowa, a crucial broker of Social Security legislation as chairman of the Senate Finance Committee, who said Monday that Mr. Bush needed to shift public opinion in the next three weeks "or you might have some question about the president succeeding."

Mr. DeLay responded: "I think we are talking about months of dialogue with the American people. We are going to talk to the American people. When we feel comfortable enough that they understand what the issue is, we will write a bill."

But the challenge is not coming up with a bill that would accomplish Mr. Bush's goals. The challenge is to do so in a way that attracts enough Democrats to make the legislation credibly bipartisan. So far, not a single prominent Democrat has been willing to embrace Mr. Bush on the issue, a marked departure from what has occurred with other contentious issues, including the Iraq war, abortion rights and tax cuts.

"This privatization plan is sinking like a rock," said Senator Barbara Boxer, Democrat of California.

Betting against Mr. Bush has been a losing proposition for the last four years, and there are still possible routes to legislation, most likely through Mr. Grassley's committee, traditionally one of the least prone to instinctive partisanship.

"My advice," Mr. Stenholm said, "is step back, relax and stop shooting down the other side's ideas. And that goes for everyone."

David E. Rosenbaum and Robin Toner contributed reporting for this article.

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Looking at the piece Revel posted, the thing that puzzles me is why do we have to 'borrow trillians of dollars' to start these accounts? If say we start with 2% or 5% of the current social security contributions, there is already enough in the kitty to cover that--of course we've already spent the kitty as we have always done--but this money would simply be set aside and not be available to spend for other things.

Would there really be enough people who would bother or come on board immediately to make a huge difference? I can't imagine that older Americans closer to retirement would see much advantage. As the new ones with the private accounts retire decades from now, they won't be pulling as much from the public monies and that eases the system.

At least this is the way I understand it. Does somebody else with better math skills maybe have a different perspective?

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To clarify my last post, the "above argument" did indeed refer to the article first posted.

Let me also clarify why this requires borrowing, because I think this is the cause of substantial confusion. The below explanation is based on what I've gathered through several papers and articles on this?-it may be slightly flawed or incomplete. The current system relies on contributions by younger tax payers to pay current SS recipients. If younger tax payers opt for partial privatization, part of their contributions would go to private accounts instead of the general SS fund. Thus, that money wouldn't be available to pay current benefits, and we would need alternative funds to offset that loss in revenue. In other words, we would need to either borrow money or increase the contribution level (Bush's plan takes the first option). Therefore, it's not about "older Americans closer to retirement" as much as it is about younger, working Americans. If many of them jump onto the privatization boat, we'll need to make up the difference in lost revenue.

The tricky part is making sense of the "borrowing." The administration argues that the federal debt that would accrue from privatization is already inherent in the system. They call it "implicit" debt. That argument has significant merit, as we're essentially borrowing from today's contributors to pay for existing benefits. This spending/revenue gap isn't apparent from the structure of social security, but it's there. The administration argues that the markets already take this "implicit" debt into account when setting interest and exchange rates. That might be; it's hard to know, but it seems likely that private investors are able to see through the current social security structure. Ultimately, I think that the administration's argument on this point is pretty good?-although it's too difficult to understand to be politically useful.

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Well reasoned Steppenwolf.

The thing is, right now there is technically a paper surplus of social security funds. In other words there has been many millions if not billions taken in that are not yet due to be paid out. That surplus is steadily shrinking however as the ratio of workers to retirees has significantly narrowed. So there is no immediate crises, but one looms out there on the relatively near horizon.

There is no real surplus in the social security fund because Congress spends every penny of it for other things. It always has.

So wouldn't it be logical that sooner or later we're going to have to start borrowing to replace the empty trust funds that have been spent for other things? What's the difference between borrowing a bit now to change the system so that the day of reckoning when the system really is out of money never comes?

Am I smart enough to figure out how to do that? No I'm not. Apparently the administration has not yet worked out all the bugs either as we don't yet have a plan to look at.

And, as we have seen, most politicians don't want to get passed this political football. Nothing seems as much of a political pariah as is social security.

It just seems to me, however, that doing nothing is no longer an option if we are going to be realistic and responsible.

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I agree that it's irresponsible to do nothing. Yes, the "paper surplus" is not a surplus at all; it's just clever Enron-style accounting.

Now for the bitter side of Steppenwolf: As far as I'm concerned, people need to face up to the facts?-we need to decrease benefits (either with or without privatization). This country has a hard time equating revenue with expenditures. People were more than happy to vote for tax cuts, but they cry and moan when we start talking about reductions in government largesse. Again and again we decide to take the easy way out?-we just increase the federal debt cap. That's irresponsible, and it's going to catch up with us sooner or later, either through SS or something else. That's one thing that makes me dislike this administration. They haven't been fiscally honest. They've decreased our revenue base through tax reductions, but they haven't ever proposed a reduction in benefits (in other words, they've offered goodies while hiding the price tag). Instead, the solution they propose is to borrow more and more and more and more I think social security is good place to make a statement: You want less taxes, you get less benefits. You get what you pay for, period.

As far as the Democrats' solution (if you can call it that), it's even worse: bury your head in the sand. It's pathetic. One side is taking the Argentinean approach (finance everything with debt), and the other side is taking the kindergarten approach (lets go play in the sandbox and hope that the country solves its own problems). In the end, I'm happy that the Republicans are bringing this issue to light, but I really do hope that someone is brave enough to be completely honest.

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Well I would agree except that social security taxes have not been decreased and therefore any tax reductions technically have not affected social security. Newt Gingrich has been much maligned this past week for proposing that social security be taken off budget, but in truth, that is the fiscally honest thing to do. Make it its own thing so Congress can't touch it for anything other than its intended purpose. (Talk about belt tightening and political suicide though--that would be a tough call for any politician to make.)

I am not convinced that tax cuts have reduced revenues--even John Kennedy the democrat knew that tax cuts stimulated the economy and thus taxes must never be raised in time of recession. So how much of the economic recovery (with corresponding increase in tax revenues) has resulted from the Bush tax cuts? Hard to say I think, but it all has to be factored in. Of course my libertarian soul is always in favor of the people controlling as much of their own assets as possible.

Has the current administration been fiscally irresponsible in their spending? It appears so, but we won't know that either for sure until we know how much will be garnered from the peace dividend if the current trends in the Middle East continue. My conservative soul also cringes at the red ink too.

The rationale behind privatizing social security, however, is a concept of reducing the entitlement in the future as people privatize their retirement funds and won't need as much social security entitlement funds and ultimately the system will be paying out so much less that it will be solvent. Again, my mind doesn't work well in that kind of math so while I understand the principle, I can't visualize it mathematically.

The ultimate danger to some, however, is that once people see how much more they have to benefit from controlling their own money, they'll want to control it all. And then we go back to those Texas counties up there that have exempted themselves from the system. Those people are very very happy not to have to be in the social security system.

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Quote:

And then we go back to those Texas counties up there that have exempted themselves from the system. Those people are very very happy not to have to be in the social security system.

Jeez, the things you people would learn if you did a little research before you posted.

http://www.dfw.com/mld/dfw/11006823.htm

Quote:

'Galveston plan' seen as model for private retirement accounts

By Howard Witt

Chicago Tribune

GALVESTON - For all the uncertainty swirling around President Bush's proposal to offer private Social Security retirement accounts, there is a corner of the country where the idea has already been tried and tested for a generation.

Three Texas counties hugging the Gulf of Mexico voluntarily withdrew from the Social Security system in 1981, transferring the retirement taxes of county employees into private investment accounts.

That's the good news: As the nation prepares to debate a momentous potential change in the bedrock federal retirement plan, there are some real-world experiences in Texas available to be studied as test cases.

The bad news is that the verdict is inconclusive.

No one here can agree whether county retirees are better off than they would have been had they stayed with Social Security -- a dilemma that mirrors the emerging complexities of the national Social Security debate.

"I didn't come out ahead," said Evelyn Robison, who was the Galveston District Court clerk for 13 years before her retirement in 2004. "My chief deputy did not come out ahead. My bookkeeper did not come out ahead. I personally don't know anyone who has retired who came out ahead."

Nonsense, countered Rick Gornto, a Houston financial manager who designed the alternate retirement plans for Galveston, Brazoria and Matagorda counties and still runs them.

"In every case we ever looked at, people end up better off in our plan," said Gornto, president of First Financial Benefits.

Plan draws scrutiny

For better or worse, what is being called the "Galveston plan" is already being scrutinized by proponents and opponents of Social Security private accounts as they cast around for models to make their respective cases. This month, House Majority Leader Tom DeLay, R-Sugar Land, visited Galveston to learn more about the plan, while Sen. Barbara Boxer, D-Calif., phoned Galveston officials for information.

What intrigues most callers is the claim made by boosters of the Galveston plan that retirees can earn benefits that are two to four times higher than those provided by Social Security, without higher costs or greater risks.

"I think what we have here is a model for the rest of the country," said Ray Holbrook, a retired Galveston County judge and one of the original proponents of the plan. "The philosophy behind it is that we're better off if we fund our own retirements."

The three Texas counties set up their alternate retirement plan at a time when local and state government entities were permitted to withdraw from Social Security. Few actually did, according to the Social Security Administration, and in 1983, Congress closed the window, leaving the Galveston plan as an unusual orphaned model.

Under the plan, which covers some 5,000 employees in the three Texas counties, workers contribute a mandatory 6.1 percent of their gross salaries to their private retirement accounts, while the counties employing them add 7.8 percent for a total of 13.9 percent.

That compares with a combined 12.4 percent Social Security contribution divided equally between employees and employers.

Most of the funds are then invested in a combination of bank securities, bonds and annuities, where Gornto says they are earning an average 6 percent return.

That's a more conservative approach than what the president has proposed -- allowing younger workers to divert up to 4 percent of their pay from Social Security into investments in the stock and bond markets -- and Galveston officials say it was key to persuading county employees to give up the safety of Social Security for the private accounts.

"We probably never would have been successful if we'd said we were going to invest in the stock market," Holbrook said. "We assured employees it would be in safe investments, bonds and annuities."

In fact, Brazoria County began allowing its employees to invest their funds in stocks several years ago. Only about a quarter elected to do so, and most have lost money during the stock market's downturn since 2000, Gornto said, further souring local officials on the option.

When the workers retire, they can elect to have their accounts paid out as a lump sum, a series of payments or a lifetime annuity. The plan also includes a substantial death benefit, ranging from $75,000 to $215,000 depending on a worker's salary, and benefits for surviving beneficiaries and dependents.

Gornto's figures show that workers across all income levels do better under the Galveston plan.

For example, Gornto says that a low-income county worker retiring at age 65 would receive $683 per month from Social Security but more than $1,000 per month from the Galveston plan.

Employees earning higher incomes can do at least twice as well as under Social Security, according to Gornto's calculations.

Some workers lose

But there is substantial debate about those numbers. Two separate studies of the Galveston plan conducted in 1999, by the Social Security Administration and the federal General Accounting Office, each concluded that many low- and medium-income workers fare worse under the Galveston plan than they would have under Social Security, while the highest-paid employees do better.[/size]

"Our simulations found that low-wage earners retiring today generally would have qualified for higher retirement incomes had they been under Social Security," the GAO report stated. "Many median-wage earners, while initially receiving higher benefits under the [Galveston plan], would have eventually received larger benefits under Social Security because Social Security's benefits are indexed for inflation."

The Social Security Administration study found that a low-income married worker who retires in 2045 would receive $670 per month under the Galveston plan, as opposed to $1,139 under Social Security. The highest-paid single workers, however, would earn $1,515 per month more under the Galveston model than under Social Security, according to the Social Security Administration calculations.

The gulf between Gornto's numbers and those from the federal agencies results from different assumptions about rates of return, length of employee service and age of retirement -- all of which can dramatically affect the size of the monthly check that a retiree receives.

Moreover, annuity payments under the Galveston plan are fixed and are not indexed for inflation, as are Social Security benefits. Nor does the Galveston plan increase benefits for a deceased worker's family based on the number of children left behind, as does Social Security. These factors, too, affect the complex actuarial comparisons between the Galveston model and the Social Security system.

Critics maintain that instituting private accounts similar to Galveston's for all workers would cause harm for many.

"These plans won't work for most people and would destroy Social Security for the vast number of Americans who depend on it," said Eric Kingson, a professor of social work at Syracuse University who has studied the Galveston plan.

"What we can learn from the Galveston experience is who will win and who will lose if we move toward this privatization plan," he said. "People who work long and hard at relatively low wages get a proportionately higher benefit from Social Security, and that's because its purpose is to provide a basic set of protections for Americans."

The bottom line for many Galveston County retirees is the size of their check every month. And some say they have been bitterly disappointed.

"I get around $460 per month now, but under Social Security, I would have gotten $1,000," said Joyce Longcoy, who retired in 1998 after 23 years working for Galveston County. "They are putting this up to be a model for the rest of the country. Some model."

A plan that makes more money for the wealthy, and less for the poor? Yeah, that sounds like a great replacement for SS.

I also find it quite funny that there are two sides of opinion listed here about whether or not the plan makes higher profits for those participating in it:

Side 1: The guy who wrote the plan who insists that everyone will do better.

Side 2: The people who are actually recieving benefits which are less, and the GAO, and the SSecurity office itself.

Which side do you think holds more water? The guy who swears the theory works, or the people who aren't getting as much money and the GAO and the SS office? Right.

Cycloptichorn

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That's a great post, Foxfyre, and I agree with much of it. However, I disagree on several fronts. First of all, the Newt Gingrich proposal exposes how tax cuts do affect the social security system, albeit indirectly. The fact that the government spends more than they take in through taxes means that they need to borrow money. Whether they borrow from social security or take it out as explicit debt makes little difference to the bottom line. If we separate the funds, it will only make our debt more transparent. That's good, but only a partial solution. Where will we get the money if we force the government to obtain funds from somewhere other than SS? Either through debt or through increased income taxes. If we reduce income taxes, we must therefore add to the overall debt burden. It we don't reduce income taxes (in other words, if we undo Bush's reductions), we may be able to absorb the fiscal hit that would inevitably follow the separation of the SS funds. We could also reduce expenditures (my preferred solution), but neither party seems capable of that.

The fact is that all expenditures (SS or otherwise) are linked to revenue?-irrespective of whether there is an explicit or implicit link. Placing SS taxes and income taxes in separate categories on your paycheck is just another way of hiding the ball through clever accounting. As far as I can tell, the only reason we separate the SS part of taxes is to make it politically feasible to impose a different type of taxing regime for SS than for everything else (SS is technically regressive as a percentage of income, making it the opposite of income taxes).

Regarding the "decrease in revenue" point, I think your faith in Bush is wishful thinking. It's true that "dynamic" taxing and returns are possible, but not at the level contemplated by our current fiscal policy. Neither the GAO nor even the OMB (the executive branch's budget calculating entity) has ever come up with a credible prediction that shows post tax-cut revenue equaling pre tax-cut revenue. In other words, they don't even believe their own puffery. Why not? As an empirical matter, we already tried this approach in the 80's and early 90's under Reagan, and to a lesser extent, Bush 1. We reduced taxes, and we waited and waited for economic growth to cause an offsetting increase in taxable revenue. We did experience growth in the 80s (although not enough to offset the revenue loss), and then a recession in the early 90s. The final conclusion: It didn't work, and Bush 1 broke his tax promise in order to tackle the mounting debt. By Bush 1's presidency, interest payments on the federal debt were eating up an exorbitant amount of our tax revenue, making the "Laffer curve" outdated and quaint (I'll post the figure later if you're interested?-I don't have the my source with me right now). Who reversed the debt situation? Somehow the combined efforts of the Republican House and Clinton managed to stop the spiraling debtat least temporarily. The best question for Bush is: why are we trying this old routine again? If Bush wants to decrease tax revenue, he need to come up with a plan for decreasing spending. It seems to me that Bush's fiscal policies are largely "faith based," as they no longer carry any serious empirical or even academic support.

Finally, don't take this post as an argument that tax cuts can't stimulate the economy (I think they can). I just think that the degree of economic stimulation theorized by Bush is total fiction, and history agrees with me. Anyway, I'm completely hijacking the thread with a fiscal debate that only tangentially involves SS. I apologize for that.

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Cylcoptichorn, I didn't catch your post before I posted. That's an interesting article. I had no idea that there was any empirical evidence concerning SS privitization. Hmm... I'll have to search for some of that data.

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Foxfyre wrote:

Well I would agree except that social security taxes have not been decreased and therefore any tax reductions technically have not affected social security. Newt Gingrich has been much maligned this past week for proposing that social security be taken off budget, but in truth, that is the fiscally honest thing to do. Make it its own thing so Congress can't touch it for anything other than its intended purpose. (Talk about belt tightening and political suicide though--that would be a tough call for any politician to make.)

I completely agree with this paragraph. The word "lockbox" is starting to come to mind, and for all its negative connotations, it fits. Not to say ss might not have problems if congress hadn't been allowed to touch it, but the problems wouldn't be as bad as what we believe we're facing.

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You have to wonder though, that if the writer posted by Cyclop has his facts straight, why are Kennedy, Boxer, et al fighting so damn hard to allow these programs to remain private?

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I'm still mulling your last post too Steppenwolf and am not avoiding a response to it. I just want it to be an informed response when I respond, and I have to do my real job for a bit here.

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Foxfyre wrote:

You have to wonder though, that if the writer posted by Cyclop has his facts straight, why are Kennedy, Boxer, et al fighting so damn hard to allow these programs to remain private?

I can't see where the article says that Kennedy and Boxer want these programs to remain private. I think they were just looking for info on the program, much like Delay. Did I miss something?

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Foxfyre wrote:

I'm still mulling your last post too Steppenwolf and am not avoiding a response to it. I just want it to be an informed response when I respond, and I have to do my real job for a bit here.

Lol, gainful employment might slightly trump online political discussion. Laughing

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SOCIAL SECURITY: IT'S NOT WHAT YOU THINK

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