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Galveston, Texas: Social Security Reform's Living Laboratory.

Investor's Business Daily (via the Club For Growth blog) explains the case of Galveston, Texas, and its successful experimentation with Social Security reform:

For 24 years, three Texas counties have been a living lab for President Bush's proposal, and so far the experiment is working.

In the early 1980s, while the federal government was working on ways to "save" the Ponzi scheme known as Social Security from an earlier insolvency crisis, officials in Galveston County looked in the private sector for a retirement option that would improve on FDR's New Deal.

They were taking advantage of the fact that municipalities were not included in the original 1935 legislation creating Social Security.

So, how does it work?

IBD:

...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.

More, from Merrill Matthews Jr., Ph.D., of the Institute for Policy Innovation (.pdf):

Workers in Galveston contribute 9.7 percentage points of their payroll tax to retirement savings. The company that manages the Alternate Plan, First Financial Benefits of Houston, pools the money from all of the employees and loans it to a top-rated financial institution for a guaranteed interest rate. Those rates have varied from about 5 percent up to 15.5 percent, but average in the 7.5 percent to 8 percent range.

How the funds are broken down:

Galveston employees contribute 6.13 percent of their income while the county pays 7.785 percent (though it only has to pay 6.2 percent). The combined 13.915 percent is dispersed as follows:

• Retirement Annuity 9.737%

• Survivorship Benefit 2.85%

• Long-term Disability 1.18%

• Waiver of Premium .148%

But why did only three counties choose to opt out if privatization was so successful?

IBD explains:

In 1983, Congress removed the provision letting municipalities opt out.

If Congress had not removed that provision, one wonders just how many municipalities today would still be footling around, throwing their money away into Social Security. Probably not many.

Bill Cotterell, of the Tallahassee Democrat (via Andrew Roth of Social Security Choice), explains why Congress removed the provision:

The only time I've wanted to argue with somebody I was interviewing was when President Ford sent some high-level Social Security administrators to a public forum in Atlanta.

I asked the top guy why, instead of "fixing" the system every few years, the government didn't just make it voluntary.

"Well, if we did that," the lord high commissioner patiently replied, "nobody would join."

Not wanting to be impolite, I said something like, "Uh, doesn't that tell you something?" But I felt like shouting, "Great system you've got there, guys - gotta make it compulsory!"

IPI offers this comparison between Galveston's Alternate Plan and Social Security (click for larger version):

Original version: here.

However, let's not make the mistake of equating Galveston's plan for President Bush's plan. There are some very real technical differences between the two plans we won't go into because they are a bit arcane and wonkish; President Bush's principles for reform address the potential problems with Galveston's otherwise successful plan often cited by the media.

Galveston's example, though, is proof that Social Security reform, under free market principles, can work.

Posted by Will Franklin · 7 April 2005 01:22 PM

Comments

Posted by: Ironman at April 8, 2005 12:11 PM

Posted by: Buffy at April 11, 2005 11:26 AM