NCPA - National Center for Policy Analysis

Report on Privatized Social Security in Galveston, Texas

May 10, 1999

As the Social Security reform debate moves toward a consensus on private accounts to replace or supplement the current system, there is growing interest in the already-existing private Social Security system established in Galveston, Texas in 1981.

Before 1983, state and local government workers were allowed to opt out of Social Security. In 1979, government workers in Galveston County, Texas, decided to do just that. Instead of paying Social Security taxes, they deposited approximately the same amount of money in private accounts. The funds have achieved an average 8.64 percent annual rate of return since inception.

Deductions from the Galveston workers' paychecks come out of before-tax income, reducing current taxes the same way that 401(k) accounts do. Also, Galveston workers have the option of taking their benefits in a lump-sum or as an annuity. Social Security provides only an annuity.

  • A new report from the Social Security Administration on the Galveston system found that for most single workers initial benefits would be considerably higher than under Social Security.
  • Only low income workers are slightly worse off, owing to the heavily redistributive aspect of Social Security.
  • Married workers do not do quite as well, due to the more generous spousal benefits under Social Security.

The SSA study says that because Social Security benefits are indexed to inflation while private pensions are not, over time Social Security recipients do better. However, it assumes inflation of 3 percent per year indefinitely, accounting for most of Social Security's advantage.

It must also be noted that the Galveston workers' funds are very conservatively invested. Had they been invested in a large stock index fund they would have almost doubled their rate of return, which would at least double their benefits.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, May 10, 1999.

 

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