Texas Sens. Cornyn, Cruz Examine Galveston Plan for Private Social Security
by Mark Whittington
January 18, 2013
Source: Yahoo! News
The Dallas Morning News is reporting that Texas Sens. John Cornyn and Ted Cruz have met with officials from Galveston, Brazoria and Matagorda counties to learn about a particular form of private social security plan that has existed since about 1980.
The idea is to explore alternatives to social security with a view toward reforming the system through some form of privatization.
The Galveston Plan
According to the National Center for Policy Analysis, the so-called Galveston Plan was adopted by municipal workers in Galveston, Brazoria and Matagorda counties as an alternative to social security. Instead of having their social security payroll taxes deposited in the social security system, these workers have them plus a contribution from their employers deposited in a conservative, fixed-interest investment that has a guarantee return of 3.75 percent. The NCPA claims that the 5000 participants in the plan have gotten about 6.5 percent return between 1981 and 2005. As a result of 1980s-era reform legislation, that option is now closed for other workers, though the Galveston Plan was grandfathered.
Unlike social security, the private plan is owned by the participant, meaning that the account can be passed to his or her heirs if the participant dies before retirement. An analysis of the Galveston Plan by Money and Markets notes that participants in the private plan can get their retirement fund upon retirement or termination in either a lump sum or as a yearly annuity. The plan also invests in a life insurance plan that provides a death benefit many times greater than social security supplies. However, the private plan is not adjusted for inflation nor does it provide certain disability benefits to dependents.
Social Security Administration and GAO: Galveston Plan good for middle and higher income workers
According to the Washington Post, an analysis of the Galveston Plan by the SSA and the GAO suggested that while the Galveston Plan provided a better deal over social security for middle- and higher-income workers, social security was still the better deal for lower-income workers. How long one lives after retirement could also affect comparable benefits, with longer-living retirees getting fewer benefits under the private plan.
First Financial: Galveston Plan much better deal for everyone
The Wall Street Journal, citing a private analysis by First Financial, suggests that the Galveston Plan is a much better deal than social security for all income groups.
"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 bottom line
The Dallas Morning News story suggests that debates over whether or not to privatize social security as a means to reform the system, largely quiet since it was last proposed by President George W. Bush, will heat up again as entitlement reform remains an issue. Cruz is especially keen to take on the fight, as part of his opportunity conservatism agenda. While opponents will claim that privatization is too risky, Cruz, Cornyn, and others will point to what they view as the success of the Galveston Plan as proof that it can work.
Texas resident Mark Whittington writes about state issues for the Yahoo! Contributor Network.