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Social Security vs. Galveston’s Private Program


Alicia Munnell, the director of the Center for Retirement Research at Boston College, is a weekly contributor to “Encore.”

It’s important to get the Galveston story straight, so it can be put to rest.

Comparing Social Security to Galveston, Texas’s privatized alternative  is comparing apples to oranges.  Social Security payroll tax rates cover not only the cost of current benefits but also the program’s legacy costs.  The legacy costs exist because benefits were paid to early retirees in excess of their contributions as discussed in last week’s blog post.   If earlier cohorts had received only the benefits that could have been financed by their contributions plus interest, trust fund assets would be much larger than they are today.  The assets in that larger fund would earn interest and that interest would cover a substantial part of the cost of benefits for today’s workers.  Without it, payroll taxes must be substantially higher.  Roughly 3 percentage points of the current 12.4% payroll tax go towards covering the startup costs.

Galveston is not saddled with these legacy costs, so that it should be able to provide more than Social Security with a given level of contribution.  But the Galveston model is not replicable on a national basis; the costs associated with the start-up of Social Security have to be paid by someone.  If the Social Security system were closed down today, revenue would have to be raised from some source to cover the benefit commitments made to date.  Therefore, Galveston cannot serve as a model for any national reform.

That said, what’s going on in Galveston?  The story began in 1981 when the County of Galveston opted out and set up an alternative plan in place of Social Security.  Two other counties – Matagorda and Brazoria – also opted out at the same time and set up similar systems.

Under the system, the employee contributes 6.1 percent and the employer 7.8 percent of pre-tax payrolls.  Slightly less than half of the employer’s contribution goes to retirement and the remainder to pay for life and disability insurance benefits.  Retirement funds are pooled and put out for bid.  The institutions guarantee a base level of interest and allow employees some additional returns when the market goes up.

The last comprehensive assessments of the Galveston plan date from 1999 (U.S. Government Accountability Office and the U.S. Social Security Administration).  Those studies confirm numbers in editorials showing that the initial benefits for middle- and upper-income employees are higher under the Galveston plan than under Social Security.  But that is the beginning not the end of the story.

  • The benefit structure is not progressive, so low income workers receive less.
  • Dependents benefits are not automatic, so married couples can do worse.
  • Benefits are not indexed for inflation, so their value declines over time.

We need a national program like Social Security to provide a base of retirement income.  All jurisdictions should participate in Social Security to share the legacy costs associated with the startup of the program.  Galveston is getting off scot free.  Moreover, data on initial benefits for middle- and upper-income individuals substantially overstate the program’s success.


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    • 1) Do you think you’ll have enough money for a colmortabfe retirement?Yes, in today’s dollars, but inflation could make colmortabfe into miserable. Current retirees will be pinched by inflation which will greatly reduce the buying power of Social inSecurity and other pensions that will get a dismal cost of living adjustment.2) Do you plan on receiving the social security benefits that have been promised to you?Although I am 44, I am not yet vested in Social inSecurity. I plan to work a J.O.B., just over broke, to earn 9 more quarters so I qualify, even if SS is only enough to visit Starbucks monthly.3) What % of your income do you save today for retirement? I save about 8% over my State of California pension, which will be 90% of my last salary when I turn 50. Yes it is a good pension, but I have worked in state prisons amidst filth, stress, tb, aids, hepatitis, and toxic attitudes for 20 years. The CDCR is accepting applications, if you want to join me. Not everyone wants to run a tier, or fight HIV+ prisoners, in a cloud of pepper spray.4) Where would you like to retire?Any place that does not have harsh winters, criminals, gang problems, etc. I hope to live in a good place to raise kids.5) How old are you, and what age do you plan on retiring?I am 44, and want to retire from the state at 50, but continue to work coaching, and making a difference to our youth. I will likely continue to work another job, for fun money, and travel cash, as well as for a hedge against inflation.

    • Super-Duper site! I am loving it!! Will be back later to read some more. I am bookmarking your feeds also.

    • “the Galveston model is not replicable on a national basis” Try to explain that it doesn’t work on a National level to the Chilean’s and the other dozen or so Countries doing it successfully now! Just an idiotic article/statement through and through.

    • This article is full of incorrect information and misleading statements. Below are the real facts regarding this plan…

      Upon retirement after 30 years, and assuming a more conservative 5% rate of return, all workers would do better for the same contribution as Social Security:

      • Workers making $17,000 a year are expected to receive about 50% more per month on our alternative plan than on Social Security — $1,036 instead of $683.

      • Workers making $26,000 a year will make almost double Social Security, $1,500 instead of $853.

      • Workers making $51,000 a year will get $3,103 instead of $1,368.

      • Workers making $75,000 or more will nearly triple Social Security, $4,540 instead of $1,645.

      • survivorship benefits pay four times a worker’s annual salary — a minimum of $75,000 to a maximum $215,000 — rather than Social Security’s customary onetime $255 survivorship to a spouse (with no minor children). If the worker dies before retirement, the survivors receive not only the full survivorship but get generous accidental death benefits, too.

      • disability benefit pays 60% of an individual’s salary, better than Social Security’s.

      But I particularly loath this statement by you “The benefit structure is not progressive, so low income workers receive less.” –Of COURSE they receive less, they earned LESS, they did LESS, they didn’t try as hard, they didn’t put in the time,,,,,equal opportunity doesn’t guarantee equal outcome!

    • I do not think the article was balanced and the editors should not have printed it if they want readers to rely on what they print. The fact that SS was never properly funded can not be used as an excuse that other plans are not better if they were funded to provide the benefits that they provide. It would have been helpful to provide some dollar examples of benefits each plan pays.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.