In Galveston, an Alternative to the "Ponzi Scheme"
September 22, 2011
Government employees in Galveston, Brazoria and Matagorda counties have controlled their private retirement plan for 30 years, called the Alternate Plan. They opted out of Social Security before Congress changed the law in 1983 to prevent others from withdrawing. Though the private program has its critics many in these counties consider their system superior, says the Texas Tribune.
- In the Alternate Plan, retirement benefits are a direct result of employee contributions.
- In each paycheck, employees contribute 13.9 percent of their gross pay (6.1 percent from the employee, 7.8 percent from the county) to a private account.
- One company guarantees a minimum rate of return of 3.75 percent to 4 percent on the accounts to safeguard employees' benefits against inflation and severe drops in market rates.
- Employees can elect to put their portion of the contributions into riskier investments, like mutual funds and stocks, potentially to generate more interest.
- At retirement, employees in the Alternate Plan can choose to take the money in a lump sum, take monthly benefits for a given time period or take a lifetime annuity, with slightly reduced benefits.
Although both programs offer disability insurance, life insurance and retirement benefits, experts agree the methods and benefits provided by the programs are difficult to compare.
- In a hypothetical calculation, an employee who earned $25,000 annually for 40 years could retire with a 20-year payout of $2,297 a month under the Alternate Plan. Under the same circumstances, an employee making $125,000 annually could retire with a payout of $11,490 a month.
- Social Security benefits change depending on the yearly adjustment for inflation, the year of retirement, and the age of the worker. But at a maximum, a worker who retires in 2011 at age 66 could receive $2,366 a month in Social Security benefits.
The lump-sum option is one of the biggest problems in the Alternate Plan according to some. If retirees do not choose the lifetime annuity, they could outlive their benefits and end up wards of the state.
Source: Becca Aaronson, "In Galveston, An Alternative to the Ponzi Scheme," Texas Tribune, September 18, 2011.
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