Posted on Fri, Feb. 18, 2005
Poorest likely worse off after Texas town abstains from Social Security
BY HOWARD WITT
Chicago Tribune
GALVESTON, Texas - (KRT) - 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 federal 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 decidedly inconclusive. No one here can agree whether county retirees are better off than they would have been had they stayed with the Social Security system - a dilemma that precisely 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.
For better or worse, what is being called the "Galveston plan" is already being scrutinized by both proponents and opponents of Social Security private accounts as they cast around for models to make their respective cases. In the last week, House Majority Leader Tom DeLay, R-Texas, paid a visit here 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 the Social Security system, 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 another 7.8 percent, for a total of 13.9 percent. That compares to 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 currently earning an average 6 percent return.
That's a more conservative approach than what President Bush 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 quit 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," said Holbrook. "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 stock market equities 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 workers here 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 just $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.
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 actually fare worse under the Galveston plan than they would have under Social Security, while the highest-paid employees do better.
"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 just $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 any individual 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," Kingson added. "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."
