< link rel="DCTERMS.isreplacedby" href="http://davejustus.com/" >

Thursday, April 07, 2005

Test Case for Social Security Privatization

Investor's Business Daily:

Galveston County Judge Ray Holbrook contacted Rick Gornto, president of Houston's First Financial Benefits Inc., which designed and administers the Galveston plan. Together, they came up with a private alternative called the Alternate Plan, which essentially mirrored Social Security's covered areas but provided better benefits. As Merrill Matthews points out in a study done for the Institute for Policy Innovation, employee and employee contributions are essentially loaned to a top-rated financial institution for a guaranteed interest rate. Employees bear virtually no risk. They get their money, plus interest, whether the stock market goes up or down. Upon their retirement, workers can take their money in a lump sum or purchase an annuity that will pay them a guaranteed income for life. It's their money, real money, in a real account with their name on it, and it's their choice. And when they die, all they have in their account becomes part of their estate. In 24 years, no one has lost a single dime. The plan was presented to the more than 2,000 employees of Galveston County, and in 1981 they voted 72% to 28% to leave Social Security and move to pre-funded personally owned accounts. In 1982, Matagorda and Brazoria counties followed suit. In 1983, Congress removed the provision letting municipalities opt out. County employees in Galveston contribute 6.13% of their salary to the plan, with participating counties adding another 7.8%. Part of their contribution is used to purchase disability insurance that pays 60% of a worker's salary — better than with Social Security — and a life insurance policy that pays four times a worker's salary from a minimum of $75,000 to a maximum of $215,000. To eliminate the risks of an often-volatile stock market, contributions are placed into conservative fixed-rate guaranteed annuities, rather than fluctuated stocks, bonds and mutual funds. According to Holbrook, the plan's annual rate of return the past 24 years has averaged 6.5%. Gornto estimates that the Galveston plan offers an employee who works 37 years at an average of $25,596 a year a monthly benefit of $1,250 vs. $669 from Social Security. An employee who works the same amount of time making $75,000 would get $3,663 a month vs. $1,301 on Social Security.
Sounds like a pretty good deal to me. Of course this doesn't deal with taking care of disabled people who cannot work and hence cannot build up an account, but I have always felt that combining that purpose with a retirement savings plan was foolish anyway. There is no logical reason why the two items should be combined into a single program. If we wish to care for those who cannot care for themselves (and I certainly think we should) it should be funded out of the general government fund, not the pension plan.

3 Comments:

Anonymous GUYK said...

Very interesting article! The hooplah over private investments for social security just doesn't compute. Most don't realize that most state retirement funds are invested in various stocks and bonds. In fact the state of Florida retirement fund lost millions when Enron folded. However, the fund is so big and well manged that the losses didn't hurt the fund. I find it hard to accept that more young people, especially those under thirty are not fighting for personal savings plans in lieu of social security.

4/07/2005 07:10:00 PM  
Blogger Dave Justus said...

I think that there are several reasons for that.

First off, the issue is highly technical and the debate has shed more heat than light so far.

Second, most young people (myself included) have pretty much written off Social Security a long time ago. We expect that the program will fail and we will never see any of the money we contribute. While Privatization would fix this, we have become acustomed to this state.

Lastly, it is difficult for young people to even imagine growing old and retiring. Seems so far away that it is tough to worry about.

4/08/2005 11:08:00 AM  
Blogger Greg said...

It's hard to imagine a worse system than Social Security. It's nice to see that there's a concrete example of an alternative that works.

4/10/2005 11:27:00 AM  

Post a Comment

<< Home