Merrill Matthews makes a persuasive case for an opt-out approach to Social Security reform in the Wall Street Journal. Until 1983, municipal governments had the ability to opt out of Social Security and erect their own pension systems. As Merrill describes, in 1980, three Texas counties—Galveston, Brazoria, and Matagorda—did so:
Now, 30 years on, county workers in those three jurisdictions retire with more money and have better death and disability supplemental benefits. And those three counties—unlike almost all others in the United States—face no long-term unfunded pension liabilities.
Since 1981 and 1982, workers in Galveston, Matagorda and Brazoria Counties have seen their retirement savings grow every year, even during the Great Recession. The so-called Alternate Plan of these three counties doesn’t follow the traditional defined-benefit or defined-contribution model. Employee and employer contributions are actively managed by a financial planner—in this case, First Financial Benefits, Inc., of Houston, which originated the plan in 1980 and has managed it since its adoption. I call it a “banking model.”
County employees’ contributions to their pensions are identical to those of Social Security. However, because the pensions are managed by outside institutions, the counties face no unfunded liabilities:
As with Social Security, employees contribute 6.2% of their income, with the county matching the contribution (or, as in Galveston, providing a slightly larger share). Once the county makes its contribution, its financial obligation is done—that’s why there are no long-term unfunded liabilities.
The contributions are pooled, like bank deposits, and top-rated financial institutions bid on the money. Those institutions guarantee an interest rate that won’t go below a base level and goes higher when the market does well. Over the last decade, the accounts have earned between 3.75% and 5.75% every year, with the average around 5%. The 1990s often saw even higher interest rates, of 6.5%-7%. When the market goes up, employees make more—and when the market goes down, employees still make something.
The “Alternate Plan” used in the three counties, like Social Security, also includes a death benefit, survivors’ insurance, and a disability benefit, but pays out much more than traditional Social Security:
But not all money goes into employees’ retirement accounts. When financial planner Rick Gornto devised the Alternate Plan in 1980, he wanted it to be a complete substitute for Social Security. And Social Security isn’t just a retirement fund: It’s also social insurance that provides a death benefit ($255), survivors’ insurance, and a disability benefit.
Part of the employer contribution in the Alternate Plan goes toward a term life insurance policy that pays four times the employee’s salary tax-free, up to a maximum of $215,000. That’s nearly 850 times Social Security’s death benefit.
If a worker participating in Social Security dies before retirement, he loses his contribution (though part of that money might go to surviving children or a spouse who didn’t work). But a worker in the Alternate Plan owns his account, so the entire account belongs to his estate. There is also a disability benefit that pays immediately upon injury, rather than waiting six months plus other restrictions, as under Social Security.
Workers of all income levels, under the Alternate Plan, make around twice as much as they would make under traditional Social Security:
Those who retire under the Texas counties’ Alternate Plan do much better than those on Social Security. According to First Financial’s calculations, based on 40 years of contributions:
• A lower-middle income worker making about $26,000 at retirement would get about $1,007 a month under Social Security, but $1,826 under the Alternate Plan.
• A middle-income worker making $51,200 would get about $1,540 monthly from Social Security, but $3,600 from the banking model.
• And a high-income worker who maxed out on his Social Security contribution every year would receive about $2,500 a month from Social Security versus $5,000 to $6,000 a month from the Alternate Plan.
The plan is extremely popular among its participants, with only 5 out of 1350 Galveston County workers choosing not to participate:
The Alternate Plan has demonstrated over 30 years that personal retirement accounts work, with many retirees making more than twice what they would under Social Security. As Galveston County Judge Mark Henry says, “The plan works great. Anyone who spends a few minutes understanding the plan becomes a huge proponent.” Judge Henry says that out of 1,350 county employees, only five have chosen not to participate.
Based on current law, six million local and state employees could adopt the Texas system. However, thanks to the 1983 Social Security reforms signed into law by Ronald Reagan, the remaining 75% of public employees cannot. A simple place, therefore, to begin reforming Social Security might be to remove the 1983 prohibition against municipal opt-outs:
The Alternate Plan could be adopted today by the six million public employees in the U.S.—roughly 25% of the total—who are part of state and local government retirement plans that are outside of Social Security (and are facing serious unfunded liability problems). Unfortunately this option is available only to those six million public employees, since in 1983 Congress barred all others from leaving Social Security.
If Congress overrides this provision, however, the Alternate Plan could be a model for reforming Social Security nationally. After all, it provides all the social-insurance benefits of Social Security while avoiding the unfunded liabilities that are crippling the program and the economy.
Social Security isn’t nearly as big of a problem as Medicare and Medicaid are. Nonetheless, it would be nice to see more candidates, and especially Mitt Romney, offering detailed proposals for reform.