The President's Commission to Strengthen Social Security is scheduled to meet this month to release its interim report, outlining the financial challenges the nation's retirement program faces. As they do, look for the usual gang of critics to renew their attacks on the commission's mission – the formulation of a proposal to reduce the financial strains on Social Security by allowing younger workers to invest a portion of the payroll tax dollars in personal retirement accounts.
According to the naysayers, allowing workers to contribute to personal retirement accounts would likely leave many retirees in the poor house. This could not be further from the truth. Need proof? Just look at the experience of three counties in Texas that have been under a private system for more than two decades
The initial Social Security Act permitted municipal governments to opt out of the system – a loophole Congress closed in 1983. In 1981 however, employees of Galveston County, Texas chose by a vote of 78 percent to leave Social Security for a private alternative. Brazoria and Matagorda counties soon followed. Today the private alternative includes about 2,740 full-time employees, plus many more participants who have retired and are now enjoying the fruits of their decision.
To make their alternative plan work, county officials turned to financial planners at First Financial Benefits, Inc., who devised a retirement savings plan that included disability income and survivors' benefits. Employees and their employer were each required to contribute 6.13 percent of income, a combined rate comparable to Social Security's 12.4 percent. About 9.7 percent of their payroll tax is deposited in a personal retirement account; the remainder pays for disability and life insurance premiums to cover the employee in case of an accident or death. But while the cost of the private program is virtually the same to the employee and employer as Social Security, the benefits are far greater.
First Financial Benefits pools the money from all the accounts and lends it to a top-rated financial institution invested in bonds and annuities at guaranteed interest rates. Those rates vary from 5 percent to 15.5 percent, but average 7.5 to 8 percent.
What does all this mean for their financial security at retirement? Even if a worker only received a 5 percent rate of return, he would still receive twice as much as Social Security offers. According to First Financial Benefits, a person earning a little over $17,000 per year who retires at 65 – the current average retirement age – would receive only about $780 per month in benefits from Social Security. But under the alternative plan, that same worker's monthly benefit increases to $1,285. Similarly, a person earning slightly over $51,000 at year can expect to receive about $1,500 per month at retirement from Social Security, but garner over $3,800 from the private system.
The differences between the alternative plan and Social Security is more than just the fact that it provides a higher post-retirement income. Retirees also have a number of options not available to their fellow retirees across the country. For example, participants can choose to take their benefits in a lump sum or purchase an annuity from among several different options that will pay them a guaranteed income for life. It's their money, so they get to choose.
In addition, if a worker dies before reaching retirement age, the spouse collects a benefit from the program's life insurance that is three times the worker's salary (with a minimum benefit of $50,000 and a maximum of $150,000). Social Security by contrast, pays a one-time death benefit of $255 to a surviving spouse, who then has to wait until she (usually the wife) retires to receive any other benefit.
Disability insurance is another good example. The alternative plan is relatively easy to qualify for and pays 60 percent of an individual's salary until age 65 or until the individual returns to work, while Social Security benefits can be very difficult to qualify for and are unavailable to young workers who have not yet worked at least five years.
Employees of the three Texas counties are enjoying rapid growth in their retirement incomes, better benefits than those offered by Social Security and the comfort of knowing that the money deposited in their accounts belongs to them and will be there when they retire. It's a comfort the rest of the country deserves.