No plan is an island: Galveston's experiment

Today's debate over Social Security sounds a lot like the debate in Galveston County a quarter-century ago. Residents here knew it was in trouble, but nobody knew when the bubble would burst.

So with the help of a few studies and a lot of predictions, the county took a gamble and opted out of the federal retirement system - creating an alternate system for their employees using individual accounts. Neighboring Brazoria and Matagorda counties would follow suit before Congress closed that option to others.

So when President Bush visited the island last week to talk about his plan to keep Social Security solvent with the help of individual accounts, the nation tuned in to find out how things were working here. And it turns out the reception here has been as mixed as the national reception of Mr. Bush's proposal.

Those at Bush's speech lauded the Galveston alternative, saying people here have received more retirement benefits than if they'd stayed with Social Security. But others say they have been disappointed with the plan.

Bush's proposal differs from the Texas Gulf Coast plans in that it would allow workers to divert only a third of their retirement taxes into personal accounts, but the underlying principle is the same: to shift the burden away from the government and onto the individual.

That flies in the face of what Society Security was created to do, says Eric Kingson, a professor of social work and public administration at New York's Syracuse University. "Social Security is built on the premise that we have some responsibility for each other," he says. "If you weren't worried about those basic protections you could use a private system, and the Galveston plan is a good example of how that system would work."

He studied the county's plan and testified on it before the House Committee on Ways and Means in 1999. "What it does is create huge winners and huge losers," he says.

Another study came to a similar conclusion. A federal General Accounting Office report in 1999 found that lower-wage workers would receive more under Social Security than under the Texas county plans, while higher-wage workers and those without children tended to do better under the alternate plans.

"That's just not true," says Brazoria County Judge John Willy. "In almost every case, county workers make double what they would make with Social Security."

He contends that when the government did that study, researchers used an average 4-1/2 percent rate of return on investments instead of what county workers have actually received since the programs began: a 6-1/2 percent average rate of return.

"A county judge or a county tax collector is going to make more because they are putting more in during their lifetime, but someone making a lower salary is getting the same high rate of return on their money," says Judge Willy.

That's part of the problem with individual accounts, say those who favor the current system. Under Social Security now, workers in the bottom-wage brackets actually do better, proportionately, than workers in the top wage brackets.

And if fewer people are paying into the system, those who are currently paying into it have to pay more, says Henry Aaron, a senior fellow at the Brookings Institution in Washington who testified on the Galveston plan before the Senate in 1999.

"The principal problem with the president's plan as presented so far is it significantly deepens the long-term deficit in Social Security," he says. "The other point is, it's exposing workers to a lot of risk while Social Security benefits are nailed down. You know what you are going to receive."

Under the Texas county plans, which cover some 5,000 workers, employees contribute 6.1 percent of their salaries to their private retirement accounts, with the county kicking in an additional 7.8 percent of payrolls. That's a slightly higher rate than the overall contribution of 12.4 percent under Social Security.

A private firm manages the accounts and invests in annuities and bonds, which are less risky than the stock market.

"I think a lot of the criticism of President Bush's plan is because it allows investment in the stock market," says Ray Holbrook, a retired Galveston County judge and one of the original proponents of the alternate plan. "I would strongly advise him that his plan should stick with bonds and annuities and not let the demon of Wall Street kill the program."

But even with bonds and annuities, private accounts can still carry risk, says former Assistant Galveston County District Attorney George Cooley, who opposed switching to the plan in 1981.

For instance, the first insurance company sponsoring their plan went bankrupt after a year, leaving county workers in limbo until a new firm was found. "So that's a lesson to be learned," says Mr. Cooley. "Any time you enter the private sector, there is going to be risk."

After working for the county for 30 years, he retired with $200,000 in his private retirement account, and opted to receive $40,000 a year for the next five years. Like many who have already retired under the Texas county plans, Cooley is also collecting Social Security from the years he worked prior to the switch.

"I have seen figures that show people are getting triple what they would have gotten under Social Security. I really doubt that, because I know two ladies who were there just as long as I was, and they are getting between $400 and $500 a month - and that's nothing to brag about," he says.

Throughout the United States, there are some 5 million government workers who rely on retirement plans other than Social Security.

Ray Cornett worked as the tax assessor for Brazoria County for 28 years and wound up receiving $20,000 a year for seven years from his personal retirement account. He says he and his wife would be "in bad shape" if he didn't also get state retirement benefits and Social Security on top of that. "There's nothing wrong with the [alternate] plan," he says. "It just doesn't keep you alive."