I see that fans of privatizing Social Security have moved away from touting the policy of murderous dictator Augusto Pinochet in Chile. The buzzword is now “Galveston.”
In the late 1970s, county employees in Galveston, Tex., made an unusual and risky decision that they thought would help secure their financial future. They took advantage of a federal provision available at the time and opted out of Social Security.
Their decision was born out of a fear that the federal entitlement program, designed to keep elderly and disabled Americans out of poverty, might not be around in the future. After careful study, the county employees chose an alternative that allowed them to open personal savings accounts.
Today, Galveston has become a poster child for critics of the Social Security system who say the decision is proof that there is a better way. Among those critics are at least two Republicans in the 2012 presidential race, which in recent days has centered on whether it is better to fix or to replace Social Security.
Well, this sounds great! In fact, Herman Cain tells me that retirees make 50% more from Galveston’s private accounts that they make from Social Security. What a deal!
Only that’s really only a small part of the story. As it turns out, the benefits do not get indexed for inflation, the “personal accounts” are not personal in the sense that the individual can administer them, and the statistics that Cain is using are from back in 1999, at the height of the market boom, and before a little thing we had in 2008 called a global financial crash.
Even under those numbers, you can see a pattern emerge:
For the highest-earning workers in the Gulf Coast county, the personal accounts have yielded nearly double what they might have collected under Social Security. But according to independent studies, the results have been less favorable to those on the lower end of the income spectrum.
In 1999, the Social Security Administration and the General Accounting Office (now the Government Accountability Office) separately examined the program adopted by Galveston and surrounding counties and found that its benefits depended on income and longevity: The lower one’s income and the longer one lived after retirement, the less advantage there was to participating in the program compared with Social Security. Also, Social Security payments increased with inflation, while payments under the Galveston plan did not.
“If you’re single, if you’re well off and you die within 10 years [of retirement], maybe you’ve done better,” said Eric Kingson, a professor of social work at Syracuse University and a vocal critic of the Galveston alternative. “For most people, it’s somewhere between ‘very bad’ and ‘not very good.’?”
And again, this is based on 1999 numbers, which neglects the sharp downturn we’ve seen in the market since then.
There’s a difference here in the theory of the safety net. The Galveston plan is basically a 401(k) plan with a defined contribution, and the more you put in (based on your salary), the more you’ll get out. But crucially, your output will not change with inflation, and you have to rely on an unforgiving market for returns. Social Security is a defined benefit plan, it’s social insurance. If you plan on living more than 10 years, that has no bearing on your monthly Social Security benefit. If you need Social Security money to live, it’s there for you. It’s an insurance policy against being left with nothing in old age. If this is all about gambling in the stock market, go with Galveston. I think the vast majority of Americans will take the sure thing.