Galveston County is at the center of the great social security “ponzi” debate

The Rickster has been fending off his “Social Security-as-criminal-enterprise words” ever since he tossed his revolver into the ring, but it turns out our neighbors in Galveston County have been the “test tube babies” of a brave new alternative social security universe.

Back in the 70s, county workers used a short-lived federal provision and voted to opt out of social security. Instead, they decided to place their retirement cash into one of Dubya’s favorite pet policies: Personal savings accounts.

It’s been forty some years, so how did that bold maneuver work out for these intrepid Gulf coasters?

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.’ ”

There are several problems with this article.

For example:

“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.”

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First, if I invest and you look at it in 5 years, it will look very different in 45 years. Second, and the most glaring difference, is the personal account will likely be there in the future - SS is on track to bankruptcy - my generation may get half what we put in if we’re lucky, our kids will not. It’s obvious to me that something is better than nothing. Third, why would we ever choose a gov’t program when there is a private alternative.

RE: First, if I invest and you look at it in 5 years, it will look very different in 45 years.

Which simply means that a model like Galveston will only be applicable and useful for those who are currently age 35 and below. If you look at the stock market’s performance for the past 10 years for instance ( say the S&P 500 ), you would actually be IN THE RED compared with what you were 10 years ago.

See here chart here for the SPY Exchange Traded Funds that tracks the S&P 500 Index :

http://finance.yahoo.com/echarts?s=SPY+Interactive#symbol=SPY;range=my

The value was 150.88 in March 2000. It is just 122.22 in August 2011.

However, looking at it from a near 20 year time frame, the value was just 45.22 in 1993. Your money would have nearly tripled in 20 years.

It looks like any option for social security to go the private mutual fund route will only be attractive to young workers, not those within 10 years of retirement.

RE: Second, and the most glaring difference, is the personal account will likely be there in the future - SS is on track to bankruptcy - my generation may get half what we put in if we’re lucky, our kids will not. It’s obvious to me that something is better than nothing

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I am not saying that this is my argument, but if you spoke to most Democrats, you would get an argument similar to the following :

Today, despite hysteria to the contrary, Social Security’s short-term finances remain solid – with $2.6 trillion in assets.

The 2011 trustees’ report projects that Social Security will be able to pay 100 percent of scheduled benefits for all workers through 2036. The issue is what happens after that.

Under a “do nothing” scenario, the trustees project that Social Security will be able to cover 77 percent of scheduled benefits after 2036. But to avoid big benefit cuts 26 years from now, Congress and the president have to do what they traditionally have done – gradually change the retirement age, cost-of-living adjustments and payroll taxes.

Now, I personally believe that a private account is better for the younger generation. However, for most voters today, I’d say that the above Dem argument still remains the more favorable one. That is the big hurdle Rick Perry has to overcome now that he used the word “ponzi”.

EDIT TO ADD — now that I’ve presented how the Democrats would argue for the current SS system. I’d like to make my own personal rebuttal....

Firstly, citing the Social Security trustees as if they’re using real numbers is naive.

The Social Security trust fund is as fictional as a JK Rowling novel. The $2.6 trillion fund is, in fact, nothing more than a stack of interest-bearing IOUs, which needs to be paid back by a government that has already reached its debt ceiling and whose credit has recently been downgraded by S&P.

By the time the trust “fund” runs out in 2036 ( the date Dems like to cite), taxpayers will be on the hook for $7.3 trillion.

One problem neither Social Security nor Mr. Ponzi’s scheme can overcome is demographics. Today, the worker-to-retiree ratio is roughly 3-to-1. That’s down from 16-to-1 in 1950. By 2030, the ratio will be closer to 2-to-1.

The fix proposed by Dems are simply tinkering around the edges:

* Congress could bump up the retirement age,

* Tweak cost-of-living-adjustments,

* Impose means testing

These are old ideas that would eke a little more life out the present system, but it will still die.

Americans in their 20s, 30s and 40s would get a better deal if they could invest the money taken from their paychecks for Social Security in a defined contribution plan. For example, the Galveston, Texas, plan for public workers has returned 7.5 percent a year on average since 1982, at little risk to employees. This isn’t a radical notion.

We can add to that a law that MANDATES that Congress SHALL NOT ( repeat NOT ) be able to RAID the SS trust fund by a certain date ( e.g. June 2013 ) to fund current expenses.

Now that the Rickster ( as the author of the above article calls Perry ) has started the debate... he better be darn sure he can follow through with a cogent argument that assures seniors that SS will be there for them, while at the same time assuring the younger generation that it will be changed for the better.

This will NOT be an easy task and will require a Reaganesque ability to communicate.

Is Rick Perry up to the task?

If he can’t do it, he won’t be president.

I still say privatizing is the best option. Herman refers to the Chilean model, here is a good explanation of that model from Investors.com:

The Chilean Model

Posted 12/27/2010 07:07 PM ET

Pensions: Nearly 30 years ago, on the very day Ronald Reagan was sworn in as U.S. president, Chile became the first nation to privatize its social security system. Three decades hence, it has surpassed all expectations.

Decades ago, Chile’s then-military dictatorship shuddered at a proposal from then-Labor Minister Jose Pinera to privatize Chile’s liability-laden pension system. The military men argued that the public was too ignorant to manage its own affairs and only government’s firm hand could be trusted to provide.

Pinera explained that the pension liabilities the government then couldn’t pay were not only perfectly payable, but could be converted into actual assets, which would become investment capital to develop the country.

All they needed to do was privatize the system.

The generals eyed Pinera balefully. But their worried junta chief, Generalissimo Augusto Pinochet, told the economist to go ahead.

Thirty years on, Pinera’s plan, adapted from the ideas of Milton Friedman, is, along with free trade, one of the two pillars of Chile’s success story, surpassing all predictions.

Pinera’s proposal began with scrapping the payroll tax on the country’s social security system and inviting all workers to take the money they were contributing and move it into a private pension.

Workers would be free to choose the fund, how much to put in, and at what age they would retire, with a minimal safety net built into the design. Past contributions would be refunded to workers by government bond. And anyone who didn’t like the idea was free to remain with the system as it was. It was a huge success: 95% of Chile’s workers chose the private system.

Pinera told the public to expect a compounded 4% rate of return under the private plan. But as of 2010, the average annual rate of return was 9.23%, far higher than promised.

By contrast, the U.S. social security system, which today accounts for a quarter of the U.S. government budget, is slated to give retiring workers in the next decade a 1% to 2% rate of return. And those entering the system today will see a negative return.

Chile’s implicit pension debt fell to just 6% of GNP — compared with 100% in the U.S., 300% in France and 450% in Italy, leaving Chile with no net debt.

Better still, the accumulated savings in the pension funds fueled Chile’s spectacular economic ascent, taking real incomes from about $4,000 per capita in the early 1980s to $15,000 today, and GDP to the 6% range most years for nearly 20 years. With that record, is it any surprise that Chile this year earned itself a membership card into the club of rich nations, the OECD?

The U.S. could have similar result if it had started on Chile’s path 30 years ago, with no debt and a phenomenal rate of growth.

But U.S. politicians, just like Chile’s fascist generals, have insisted the public is too stupid to fend for itself without big government. Given U.S. politicians’ fraudulent mismanagement and abuse of Social Security in recent years, such claims are outrageous.

It’s time for the U.S. to make up for 30 wasted years. Given the stunning success story of our southern neighbor and our growing fiscal crisis, it’s time to privatize all or part of Social Security.

http://www.investors.com/NewsAndAnalysis/Article/557939/201012271907/The-Chilean-Model.aspx

We know that the Chilean Model is SOLVENT. so is the Galveston Model.

Social Security as currently set up OTOH is very dependent on DEMOGRAPHICS and TAXES.

However, we should not idealize the Galveston Plan in terms of what it can deliver...

Whatever the level of initial benefits, the Galveston plan’s retirement benefits are NOT indexed for inflation.

So Galveston County retirees see the buying power of their monthly checks reduced over the years, while Social Security benefits are subject to an annual cost of living adjustment.

Although the Social Security COLA was zero for 2010 and 2011, that followed four yearly increases of 4.1 percent, 3.3 percent, 2.3 percent and 5.8 percent. Since 1984 the average yearly COLA increase for Social Security has been just under 2.9 percent, even averaging in the last two years of no increase.

Does the Chilean Model account for future inflation?

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