Galveston’s Social Security alternative seen as a model
In the late 1970s, county employees in Galveston, Tex., made an unusual and risky decision that they thought would help secure their financial future. They took advantage of a federal provision available at the time and opted out of Social Security.
Their decision was born out of a fear that the federal entitlement program, designed to keep elderly and disabled Americans out of poverty, might not be around in the future. After careful study, the county employees chose an alternative that allowed them to open personal savings accounts.
Today, Galveston has become a poster child for critics of the Social Security system who say the decision is proof that there is a better way. Among those critics are at least two Republicans in the 2012 presidential race, which in recent days has centered on whether it is better to fix or to replace Social Security.
Texas Gov. Rick Perry has been the most prominent critic of the current system, calling it a “monstrous lie” and a “Ponzi scheme” and, in doing so, taking on one of the nation’s most sacrosanct programs.
Though polls show that Americans are concerned about Social Security’s long-term viability, they remain largely opposed to any of the changes to it proposed in recent years. The idea of creating private accounts proved unpopular when President George W. Bush suggested it in 2005.
Perry has revived the debate and pointed to Galveston’s program as a better approach. In his 2010 book, “Fed Up! Our Fight to Save America From Washington,” he wrote that “employees in those private plans, having exercised their liberty at Washington’s sufferance, are reaping the benefits.”
He isn’t the only White House hopeful to hold up Galveston as a model. In Monday’s Republican debate in Tampa, businessman Herman Cain said that retirees in Galveston are “making at least 50 percent more than they would ever get out of Social Security,” a statement that the fact-checking site PolitiFact rated as only partly true.
For the highest-earning workers in the Gulf Coast county, the personal accounts have yielded nearly double what they might have collected under Social Security. But according to independent studies, the results have been less favorable to those on the lower end of the income spectrum.
In 1999, the Social Security Administration and the General Accounting Office (now the Government Accountability Office) separately examined the program adopted by Galveston and surrounding counties and found that its benefits depended on income and longevity: The lower one’s income and the longer one lived after retirement, the less advantage there was to participating in the program compared with Social Security. Also, Social Security payments increased with inflation, while payments under the Galveston plan did not.
“If you’re single, if you’re well off and you die within 10 years [of retirement], maybe you’ve done better,” said Eric Kingson, a professor of social work at Syracuse University and a vocal critic of the Galveston alternative. “For most people, it’s somewhere between ‘very bad’ and ‘not very good.’ ”
Backers of the Galveston program say that the government agencies used skewed numbers in their analyses and that the benefits for lower-income workers are better than the reports reflected. Still, they acknowledge that it may not be as beneficial for lower earners because it does not distribute money according to a formula that helps the poor, the way Social Security does.
“We did not weight it in favor of higher- or lower-income people,” said Rick Gornto, the financial planner who devised the program. “You put your money in, you invest it, and you get your money out.”
Unlike Bush’s ill-fated plan, which was in some ways inspired by Galveston’s, the Galveston alternative is based on a banking model, Gornto said. So even in these tough economic times, the accounts are getting their guaranteed minimum of 3.75 or 4 percent interest, he said.
Critics of the Galveston program say it would be unwise to change Social Security so drastically, because it is so popular and is in better shape than other federal entitlement programs such as Medicaid.
It would be especially foolish “to pull apart this basic protection, something that people rely on in this current recession,” Kingson said. “Something like the Galveston plan would do nothing but exacerbate economic uncertainty.”