RIDER COMMENT: This little-known story of three Texas counties that set up their OWN unique and highly successful social security plans (a brief option that has since gone away) deserves widespread publicity. Years ago I wrote about this, but frankly had forgotten about their instructive experience.
The article below from NCPA is an excellent summation of their approach — and the impressive result. To see the bottom line graph comparing the paltry SS payouts to this plan, you’ll need to go to the URL. But there are other benefits as well — for both taxpayers and the employees.
This article is a “MUST READ!”
Social Security by Choice: The Experience of Three Texas Counties
Thursday, April 12, 2012
by Merrill Matthews
Stock market volatility remains one of the primary objections to switching from the current pay-as-you-go method of funding Social Security benefits to a system of prefunded personal retirement accounts. However, three Texas counties that opted out of Social Security 30 years ago have solved the risk problem.
Galveston County opted out of Social Security in 1981, and Matagorda and Brazoria counties followed suit in 1982. County employees have since seen their retirement savings grow every year, including during the recent recession. Today, county workers retire with more money, and have better supplemental benefits in case of disability or an early death. Moreover, the counties face no long-term unfunded pension liabilities.
If state and local governments — and Congress — are really looking for a path to long-term sustainable entitlement reform, they might consider what is known as the “Alternate Plan.”
The Alternate Plan. The Alternate Plan does not follow the traditional defined-benefit or defined-contribution model. Rather, employee and employer retirement contributions are pooled and actively managed by a financial planner — in this case, First Financial Benefits, Inc., of Houston, which both originated the plan and has managed it since inception.
Like Social Security, employees contribute 6.2 percent of their income, with the county matching the contribution (Galveston has chosen to provide a slightly larger share). Once the county makes its contribution, its financial obligation is done. As a result, there are no long-term unfunded liabilities.
The Banking Model. Unlike a traditional IRA or 401(k) plan, where account holders can actively manage their investments, the contributions are pooled, like bank deposits to a savings account, and top-rated financial institutions bid on the money.
Those institutions guarantee a base interest rate — usually about 3.75 percent — which can increase if the market does well. Over the last decade, the accounts have earned between 3.75 percent and 5.75 percent every year, with an average of around 5 percent. The 1990s often saw even higher interest rates, 6.5 percent to 7 percent. Thus, when the market goes up, employees make more; but when the market goes down, employees still make something, virtually eliminating the problem of workers deciding not to retire because of major drop in the market.
A Real Alternative to Social Security.
Social Security is not just a retirement fund. It is social insurance that provides a death benefit, survivors’ insurance and a disability benefit. When financial planner Rick Gornto devised the Alternate Plan for Galveston County he wanted it to be a complete substitute for Social Security. Thus, part of the employer contribution provides a term life insurance policy, which pays four times the employee’s salary tax free, up to a maximum of $215,000. That’s nearly 850 times Social Security’s death benefit of $255.
If a worker participating in Social Security dies before retirement, he loses his contribution (though part of that money might go to surviving minor children or a spouse who never worked). Workers in the Alternate Plan own their account, so the entire account belongs to the estate. There is also a disability benefit that pays immediately upon injury, rather than Social Security’s six month wait, plus other restrictions.
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Go to the URL for the full story, and the informative graph.