NCPA - National Center for Policy Analysis


March 16, 2005

Private Social Security accounts are already working in Texas and have been for the past 25 years, say observers.

In 1981, federal law allowed municipal government workers to opt-out of Social Security and replace it with private retirement accounts. Galveston County, Texas, decided overwhelmingly to pursue a locally controlled system of private accounts, called the "Alternate Plan."

Under the plan the county withholds about six percent of each employee's salary for retirement; that money, along with a partial match by the county, is invested in personal accounts for each participating employee. The remaining county match covers the cost of disability and life insurance policies for employees, which also pay benefits much higher than those offered by Social Security. It has had remarkable results:

  • From 1982 through 1997, the rate of return on funds invested in the Galveston plan has averaged 8.6 percent, a return more than four times greater than Social Security.
  • County workers earning slightly more than $17,000 a year can retire at age 65 with a monthly payment of $1,285 compared with $782 a month under Social Security.
  • Workers earning $51,263 a year could retire at age 65 with a monthly benefit of $3,846 compared to $1,540 under Social Security.

Even under the relatively low "guaranteed rate of return" in the Galveston plan gives a yield of 4.24 percent, more than double the return for Social Security.

Along with Galveston County, nearby Brazoria and Matagorda Counties and Texas City also voted to quit Social Security in favor of private accounts. Amid growing enthusiasm for an alternative to Social Security, Congress voted in 1983 to end the provisions that give municipal workers the option to leave the federal system.

Source: Ray Holbrook and Alcestis "Cooky" Oberg, "A model for Social Security reform: A case study already exists in Galveston County, Texas -- and might offer some lessons for lawmakers in Washington," USA Today, March 16, 2005; and Jeff Johnson, "Social Security Alternative Already Working in Texas," Cybercast News Service, February 3, 2005.


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