That's the buzz in Washington. One cause is obvious: investing in common stocks isn't attractive when most people have been hit by devastating losses. The other cause is less obvious: the claim that administering individual accounts for every worker in America would be an expensive nightmare.
I believe these arguments are wrong.
They are wrong for a simple reason. There is an alternative. We can privatize Social Security without creating the Mother of All 401(k) Plans.
The alternative isn't an idea. It has been in use for twenty years. Its participants are happy with the results. The only reason this solution has been overlooked by the Washington policy establishment is that they don't spend much time in south Texas.
More than 20 years ago Galveston County asked Rick Gornto, a financial planner, to create an alternative to Social Security. They wanted a privately funded retirement plan with a life insurance and disability income component comparable to Social Security.
Could he design one?
When the plan was presented to employees in 1981, 72 percent of the employees voted to adopt it. One year later Matagorda and Brazoria counties also adopted the plan. Many others would have joined but no one was allowed to opt out of Social Security after 1983, Mr. Gornto said in a recent telephone interview.
Here's what the counties did. They dropped out of the Old Age Assistance and Disability (OASDI) portion of Social Security but remained as participants in Medicare. They continued to pay the Medicare portion of the employment tax. To replace OASDI, employees contributed the same 12.4 percent to the plan as other workers contribute to the Social Security retirement and disability program.
In Mr. Gorntos' plan employees don't worry about mutual fund choices. Instead, the plan manager pools the money and loans it to a major financial institution for a competitive and guaranteed return. The return has varied from 5 to 15 percent without risk to participants. Administration and record keeping are simple.
Although returns are lower than stock market returns, the benefits payable to retiring workers are generally higher than Social Security benefits. According to First Financial Benefits--- the firm that administers the plan--- a high-income worker (earning $51,263) would receive a lifetime income of $3,846 a month. That's 90 percent of pre-retirement income. The same worker would receive only $1,540 a month (36 percent of pre-retirement income) from Social Security.
Low-income workers, who receive disproportionately high benefits under Social Securities' benefit formula, also do better under the private plan. A worker with an annual income of $17,124 would receive $1,285 a month from the plan. Again, that's 90 percent of pre-retirement income. The same worker would receive only $782 a month (54.8 percent of pre-retirement income) from Social Security.
Workers also have a choice. They can receive a lifetime annuity or they can take the money as a lump sum.
Disability and life insurance benefits are also better. Each worker has three years of annual wages in life insurance--- a minimum of $50,000 and a maximum of $150,000. Merrill Matthews, resident scholar at the Institute for Policy Innovation in Dallas, told me of a judges' widow who received $150,000 in life insurance coverage and $125,000 that had accumulated in the judges' retirement account. She would have received only $255 from Social Security because there were no children eligible for Social Security survivors' benefits. The widow would not have been eligible for full Social Security retirement benefits until she reached age 65.
Similarly, disability benefits are about twice as large as the benefits the same worker would receive from Social Security.
Bottom line: privatizing Social Security is still a reasonable option.
To read a brief discussion of the program visit the IPI website and look for "Retirement Savings Accounts as Safe as Your Bank."
To read an earlier column about existing programs that are substitutes for Social Security
The National Center for Policy Analysis website devoted to Social Security
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