The Galveston Model for Social Security Reform

Thursday, August 23rd, 2012 and is filed under Blog, Issues

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Ever since Paul Ryan was chosen to run alongside Mitt Romney, the issue of Medicare reform has been brought to the forefront of the presidential campaign.  But there has been utter silence on the largest expenditure in the federal budget; Social Security.  In large part, the silence is due to the fact that Ryan has backed off his reform plans for the retirement program, and has instead focused his attention solely on Medicare reform.  Nonetheless, Social Security is something that must be reformed; not just because of its growing burden on the federal budget, but because it is a lousy program and is the single biggest factor in creating hopeless dependency on government.

According to the latest figures from the CBO, 56 million Americans are on Social Security (either old-age benefits or disability) for a cost of $768 billion in 2012.  That accounts for 21.5% of the entire federal budget.  We will never limit the role of government and balance the budget unless we allow Americans to control at least part of their retirement.  We are all rightfully outraged that Obamacare will force us to purchase health insurance, but where is the outrage over the lack of choice and control over our own retirement?

There is no doubt that the retirement age might have to be raised a bit and some of the benefits might have to be cut in order to sustain the program.  But that is only prudent and fair if younger Americans are afforded the opportunity to opt out (at least partially) of that system and control their own retirement.  We don’t need European austerity measures if they will not accompany a pro-growth plan that encourages private ownership and choice in retirement security.  We need the flexibility to place our payroll tax contributions into better investments, even if they are somewhat regulated by the Treasury.

In recent years, many Republicans have run away from the idea of private accounts because the stock market has proven to be more risky and less profitable than it was in the ‘90s.  However, private accounts invested in stocks and mutual funds are not the only option for Social Security reform.  The Galveston Alternate Plan provides a great example of how private accounts can work in a more profitable way than the current system while protecting from unnecessary risk.

In the early ‘80s, three Texas counties – Galveston, Matagorda and Brazoria – opted out of the federal Social Security system and offered its employees an alternate plan that allowed them to retire with a guaranteed higher rate of return.  The 6.2% contribution from the employee along with the county’s matching payroll contribution was pooled together and managed by a private company, which guaranteed a 3.75% minimum rate of return.  Obviously, in good years during the ‘90s, beneficiaries saw rates of return in excess of 7%.  But they would never dip below the guaranteed rate during down times.  This allowed the average worker to retire with an average 5% rate of return.

Under the Galveston plan, retirees have the option of taking their money in one lump sum or gradually withdrawing the funds through an annuity.  This affords them the flexibility to own their money and pass it along to their heirs, something that cannot be done under most circumstances in the federal system.  Imagine if the federal government would adopt a similar system for all workers in a way that would make it portable from job to job?

It is incontrovertibly clear that any free market system would net a better rate of return for those who actually contribute enough to the system.  The only retirees that might not receive as much upon retirement are those who are in the low-income bracket for most or all of their career.  But the reality is that for those workers, Social Security never was an insurance plan, it was a soft-welfare program.  The formula is weighted in such a manner that low-income earners receive far more than they contributed.

I know that my mother-in-law was a stay-at-home mom and barely worked over most of her life, yet she is receiving a regular Social Security check.  The check is not substantial, but it is undoubtedly more than she ever contributed.  This in itself is unfair, but politicians will never have the guts to end the formula.  As such, there’s no reason why we cannot preserve the current system as an option for some workers, while ensuring the middle and higher-income earners have a chance to get a better rate of return.  This will also alleviate the long-term unfunded liabilities of the federal government.

The Galveston plan is just one model of Social Security reform.  The media always decries the lack of compromise, but conservatives would be more than happy to compromise on various reform plans that achieve the abovementioned results.  However, liberals refuse to come to the table and recognize the current system is broken, unfair, and inefficient.  As conservatives, we would like to discuss substance, but they have no interest in anything loftier than insidious class-warfare and the politics of division.  Social Security will only remain the “third-rail” of politics as long as liberals are willing to use it as a weapon of mass destruction.