By Lou Ann Anderson
Social Security reform provides a fertile battleground of contention as the administration of President George W. Bush learned with its 2005 effort. Since then, Democrats have offered no reforms to ensure the program’s sustainability while Republicans, fearful of being tagged by the Left as anti-poor or uncaring, soft-pedal long-term, incremental changes.
Three Texas counties are proof that substantial Social Security reform is both possible and lucrative to program participants.
Meanwhile, three Texas counties have proven that substantial reform is not only possible, but it can be a financial boon to program participants – and a 30+ year track record documents this claim.
In a new publication, The Private Sector Can Reform Social Security’s Disability Program, Dr. Merrill Matthews, Ph.D., a resident scholar with the Institute for Policy Innovation, outlines how Galveston County opted out of Social Security in 1981 with Matagorda and Brazoria counties following suit in 1982. The three counties instead adopted what’s known as the “Alternate Plan.”
The current system
Social Security, he explains, comprises three separate but related programs. Most well known is the small income stream for which seniors having contributed the required 40 quarters qualify. A disability insurance provision covers those who become disabled while a survivorship provision primarily assists a qualified deceased worker’s spouse or minor children.
The 12.4 percent FICA payroll tax currently paid by workers goes to the Social Security Trust Fund. Within that fund, 10.6 percentage points are directed to the old age and survivors portion known as the OASI Trust Fund, while a DI Fund that provides disability insurance receives 1.8 percentage points.
Neither is doing well, but with disabled beneficiaries having grown nearly 50 percent over the last decade, the disability insurance trust fund is in worse shape as 2016 is projected to bring a shortfall allowing only 81 percent of DI benefits to be paid.
The Alternate Plan
Per Matthews, with adoption of a model called The Alternate Plan, county employees have seen annual growth in their retirement savings, including during the recent recession. “The workers today retire with more money and have better supplemental benefits in case of disability or early death,” Matthews writes of the three Texas counties. “Another advantage, counties face no long-term unfunded pension liabilities.”
The Alternate Plan follows neither traditional defined-benefit or defined-contribution models. Matthews describes the employee and employer retirement contributions as “pooled and actively managed by a financial planner — in this case, First Financial Benefits, Inc., of Houston, which originated the plan and has managed it since inception.”
Key provisions from the retirement portion of plan include:
- Akin to Social Security, counties generally match the 6.2 percent employee income contributions though Galveston has chosen to provide a slightly larger share.
- The county’s financial obligation is completed with its contribution leaving no long-term unfunded liabilities.
- Unlike a traditional IRA or 401(k) plan, which account holders can actively manage, contributions are pooled and top-rated financial institutions bid on the money.
- Institutions guarantee a base interest rate — usually about 3.75 percent — which can increase if the market does well.
Matthews writes how accounts have earned between 3.75 percent and 5.75 percent every year, with an average of around 5 percent, over the last decade. Higher interest rates, 6.5 percent to 7 percent, were seen in the 1990s.
Stock market volatility is often touted as a disadvantage of privatized plans. The Alternate Plan, however, offers employees making more when the market goes up, yet still making something when it goes down. Matthews contends, “This virtually eliminates the risk that a major drop in the market will cause workers to delay retirement.”
A 1999 Government Accountability Office analysis of disability benefits under the private sector Alternate Plan and Social Security’s Disability Insurance (SSDI) program found Alternate Plan employees are immediately eligible to receive disability insurance while workers participating in Social Security and over the age of 30 must work 20 of the previous 40 quarters (i.e., five years) to be eligible for DI.
The GAO additionally found that low-income disabled workers in 1999 would receive nearly twice as much under the Alternate Plan as under Social Security. A higher-income worker would receive more than twice the SSDI amount.
Key points related to the Alternate Plan’s disability component include:
- Disability benefits are based on the worker’s salary. Today’s disabled workers can receive between 66 percent and 80 percent of their monthly salary, up to a maximum of $8,000 a month. Under SSDI, the large majority receives less than $1,700 a month with only a handful receiving more than $2,800.
- Disabled people are better off under the Alternate Plan as also is the country because private sector companies monitoring benefit recipients ensure (1) they actually are disabled and (2) whether they have improved and could return to work—both sources of significant potential fraud in the current system.
The Alternate Plan addresses Social Security’s survivorship provision by replacing it with a private sector life insurance policy. In contrast to Social Security’s $255 death benefit, a worker’s death qualifies their family or estate proceeds equal to four times the employee’s salary up to $215,000.
Matthews notes how “the government would be paying more if there were a surviving spouse who had not personally qualified for Social Security benefits, but under the Alternate Plan every deceased employee’s family (or estate) gets the life insurance.”
The bottom line
“The best way to solve Social Security’s long-term financial challenges is to privatize all of its components,” Matthews contends. “However, critics have long resisted that solution for the income security portion, arguing that the stock market is too volatile and that workers can’t be trusted to make good investment decisions.”
He further acknowledges that while any transition to personal retirement accounts creates funding challenges, less complex reform opportunity exists for Social Security’s disability and survivorship components. Not only do contributions from current workers mostly go to current workers, but this component doesn’t require investing, just choosing an insurer.
“The boldest reform proposal would transition all three Social Security programs to the private sector,” he concludes. “But if that is too much, starting with disability and survivorship would be a good first step.”