NCPA - National Center for Policy Analysis

San Diego's Employees Enjoy Cushy Retirement Benefits

May 27, 1999

Due to a quirk in federal law, some five million employees of state and local governments around the country have managed to escape the Social Security system. The government entities they work for have set up separate retirement plans for them -- and they are doing very well.

Those employees are largely in California, Colorado, Illinois, Louisiana, Massachusetts, Ohio and Texas. Those in defined- benefit plans will get between 3.5 and 7.5 times as much in annual retirement benefits as they would if they had been covered by Social Security, according to a 1977 study by Third Millennium. The higher returns are possible because workers contributions have been invested in the stock and bond markets.

In addition to retirement insurance, almost all the plans provide disability and survivor insurance.

Here's how the system has worked in San Diego, according to a Cato Institute report:

  • Some 8,000 city workers contribute 3 percent of their salaries to private retirement accounts.
  • They can choose to invest in several different funds with varying degrees of risk and have the option to put in up to 4.5 percent more of their salary if they wish.
  • And almost all do, quite possibly because the city matches 100 percent of a worker's contribution.
  • Participants can retire without penalty after 20 years of service and turning 55.

Cato found that even those who put the minimum into their accounts could expect to get more in retirement benefits than they could under Social Security. Rates of return have averaged 8 percent annually on the lowest risk fund.

Some 1,500 workers for Galveston County, Texas, have avoided Social Security and are covered under a somewhat similar plan. That system offers disability benefits at 60 percent of salary -- compared to 70 percent for San Diego workers. Under the Galveston plan, survivors receive a lump-sum benefit of 300 percent of annual earnings -- with a $50,000 minimum.

Source: Carrie Lips, "State and Local Government Retirement Programs: Lessons in Alternatives to Social Security," SSP No. 16, March 17, 1999, Cato Institute, 1000 Massachusetts Avenue, N.W., Washington D.C. 20001, (202) 842-0200; Macroscope, "Life Without Social Security?" Investor's Business Daily, May 27, 1999.


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