The Next Social Security Meme?.As the privatization campaign starts gearing up for what may be its last great push this fall, we should expect expect to hear more about domestic private-account schemes that are supposedly working better than Social Security. Prime among them will be a program created in 1979 for municipal employees in Galveston, Texas.
Galveston is the sort of privatization stalking horse that the right loves, like Chile?s overpraised program. It seems to provide better benefits than Social Security, it seems to produce a superior rate of return, it seems to give workers control over their retirement investments. Those are claims its creators make, in any case.
Conservative talk radio hosts promote Galveston constantly as the logical alternative to Social Security; I first heard about the plan on just such a program, on which I was appearing to promote my Social Security book. President Bush talked it up at a staged event in Galveston back in May. As a House subcommittee hearing this summer, Texas GOP Congressman Pete Sessions called it ?an alternative an alternative to the Social Security system that gives retirees control of their own money at virtually no risk to the beneficiary.?
Well…no. As with all such claims, the devil?s in the ?buts,? and the ?buts? in Galveston?s program are sobering. Here?s a short list, courtesy of a researcher at the Wharton School of Business who examined the plan in 1999:
Under the Galveston Plan, contribution rates (payroll taxes) are higher than under Social Security; there is a risk of outliving one?s benefits under certain pay-out options (lump-sum or fixed annuity); there are no additional spousal or dependent benefits (benefits are based entirely on contributions); benefits are paid to a named beneficiary and there is no guarantee that benefits will be provided to a spouse/divorced spouse or dependent child; benefits are not portable to future employers; benefits are not adjusted for inflation; and, in general, benefits are lower for those with lower earnings and/or a greater number of dependents who qualify under Social Security.
The absence of inflation indexing is key here, because it gives context to the favorite claim made by the purveyors of the Galveston model: that its retirement benefits are higher than Social Security?s. ?Workers making $51,000 a year will get $3,103 instead of $1,368? is a typical statement.
But that?s the initial benefit, which instantly starts getting eroded by inflation, and it?s for single wage-earners. For unmarried employees, assuming a 3% annual inflation rate, Wharton calculated, the Galveston benefit falls below Social Security within 15 years for all but the very highest single wage-earners (the top 10%); for those in the lowest wage category, it falls short of Social Security at the 15-year mark by nearly 40%.
For married workers the figures are even more dire, because employees wishing to protect their spouses and dependents have to take a huge cut in their own benefits to do so. (Social Security, of course, provides an independent benefit for spouses and minor children of covered workers, even if the worker dies before retirement.) Benefits for married workers, except for the very high earners, are lower than Social Security from the start, averaging as little as 59% of Social Security retirement stipends upon retirement and falling to as little as 33% at the 20-year mark.
The Galveston gang?s claim of a rate of return superior to Social Security?s also needs a caveat. The figure is pumped up because Galveston doesn?t provide benefits that are routinely provided under Social Security, but aren?t normally calculated as part of its return to individual retirees. In Galveston, spouses and dependents may get a lump-sum distribution after the breadwinner?s death, but making the money last a lifetime and protecting it from inflation is their problem. Social Security, of course, provides a guaranteed lifetime benefit for spouses and guaranteed stipends for children up to the age of 18 (or 19 if they?re still in secondary school).
There are lots of other shortcomings in the Galveston plan, but that won?t keep Bush or the right from pushing it forward as the Great Alternative. Keep an eye out for this one: forewarned is forearmed.