NCPA - National Center for Policy Analysis

Counties That Opted Out Receive Attention

May 16, 2000

Government workers on the Texas Gulf Coast stopped paying Social Security taxes two decades ago and started investing in the private sector. Galveston County's 20-year- old experiment is being studied by both sides in a national debate over privatization of Social Security.

Fed up with federal payroll taxes and alarmed by signs that Social Security would go broke, Galveston County employees voted nearly 3-to-1 in 1980 to drop out. The change became official Jan. 1, 1981.

Two neighboring counties, Brazoria and Matagorda, soon followed Galveston's lead. But as part of a 1983 Social Security overhaul, Congress closed the loophole that allowed state and local government employees to opt out of the system.

About 3,000 workers plus 1,000 retirees from those counties are now among the roughly 5 million employees of state and local governments who work outside the Social Security system. Most of the other alternatives are strictly retirement programs, but Galveston's was designed to provide for worker disabilities and death.

  • Workers in Galveston County contribute 6.13 percent of their income, compared with the 6.2 percent Social Security tax.
  • The county contributes 7.79 percent, compared with 6.2 percent for Social Security employers.
  • The county workers' money is invested in bonds and annuities, and investment decisions are made by First Financial Benefits of Houston.
  • The funds aren't invested in the stockmarket, although former Galveston County Judge Ray Holbrook, who pushed for the change, says "If we'd have put it in the stock market, we'd be two or three times better off than we are."

Unlike workers in the Social Security system, former county employees can collect their money at any age. They can take it all at once or spread it over time.

Source: Ron Hutcheson, "Galveston Experiments with Social Security," Fort Worth Star-Telegram, May 15, 2000.


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