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r3020
Senior Advisor

Alternate social security plan

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Stock market volatility remains one of the primary objections to switching from the current pay-as-you-go method of funding Social Security benefits to a system of prefunded personal retirement accounts. However, three Texas counties that opted out of Social Security 30 years ago have solved the risk problem.

Galveston County opted out of Social Security in 1981, and Matagorda and Brazoria counties followed suit in 1982. County employees have since seen their retirement savings grow every year, including during the recent recession. Today, county workers retire with more money, and have better supplemental benefits in case of disability or early death. Moreover, the counties face no long-term unfunded pension liabilities.

If state and local governments -- and Congress -- are really looking for a path to long-term sustainable entitlement reform, they might consider what is known as the "Alternate Plan."

A Different Model
The Alternate Plan does not follow either of the traditional defined-benefit or defined-contribution models. Rather, employee and employer retirement contributions are 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.

Like Social Security, employees contribute 6.2 percent of their incomes, which the counties match. (Galveston has chosen to provide a slightly larger share.) Once the county makes its contribution, its financial obligation is finished. As a result, there are no long-term unfunded liabilities.

Guaranteed Interest
Unlike a traditional IRA or 401(k) plan, which account holders can actively manage, the contributions are pooled, like deposits to a bank savings account, and top-rated financial institutions bid on the money.

Those institutions guarantee a base interest rate -- usually about 3.75 percent -- which can increase if the market does well. Over the last decade, the accounts have earned between 3.75 percent and 5.75 percent every year, with an average of around 5 percent. The 1990s often saw even higher interest rates, 6.5 percent to 7 percent. Thus, when the market goes up, employees make more; but when the market goes down, employees still make something. This virtually eliminates the risk that a major drop in the market will cause workers to delay retirement.

Death and Disability
Social Security is not just a retirement fund, but a social insurance program that provides death, disability and survivors benefits. When financial planner Rick Gornto devised the Alternate Plan for Galveston County, he wanted it to be a complete substitute for Social Security. Thus, part of the employer contribution provides each worker a term life insurance policy, which pays four times the employee's salary, tax free, up to a maximum of $215,000. That's nearly 850 times Social Security's death benefit of $255.

If a worker participating in Social Security dies before retirement, he loses his contributions (though part of that money might go to surviving minor children or a spouse who never worked). A worker in the Alternate Plan owns his account, so the entire account belongs to his estate. There is also a disability benefit that pays immediately upon injury. Social Security's comparable benefit comes with a six-month wait, and includes other restrictions.

More Retirement Income
Alternate Plan retirees do much better than those who retire under Social Security. According to First Financial's calculations, based on 40 years of contributions (see the figure):

• A lower-middle income worker making about $26,000 at retirement would get about $1,007 a month under Social Security, but $1,826 under the Alternate Plan.

• A middle-income worker making $51,200 would get about $1,540 monthly from Social Security, but $3,600 from the Alternate Plan.

• And a high-income worker who maxed out on his Social Security contribution every year would receive about $2,500 a month from Social Security compared to $5,000 to $6,000 a month from the Alternate Plan.

 

http://spectator.org/archives/2012/03/15/social-security-by-choice-the

29 Replies
Red Steele
Veteran Advisor

Re: Alternate social security plan

i wonder if it has a provision for paying for a retired persons medical needs, like medicare currently does. THe huge multi trillion dollar looming budget abyss is for medicare coverage, much more so than social security.

 

Also the reason that these numbers work so well is that the current social security/medicare system is skewed so that lower earners get a huge deal compared to what they pay in versus the higher earning individuals. Since the lower income individuals receive basically a "welfare" benefit because of this, its seems only fair that all parts of socieity should pay for their welfare benefit, not just the current workers with higher "earned income".

bruce MN
Advisor

Re: Alternate social security plan

Very interesting that you'd co-opt on to a piece that validates the pariaah that is the government employee.  The difficult to fire, built in step and grade wage increase parasitical lot of them.

 

The one thing that glares out at me here is that it talks about people with job security and steady ability to make the contribution, matched by the taxpayer.  This is so irrelevant for the middle class private sector employed person who is at the whim of his employer and often one paycheck from being able to make that contribution, much less pay his rent or mortgage or health insurance premium.

 

 

 

hardnox604008
Advisor

Re: Alternate social security plan

A few thoughts:

 

A very different approach than the Bush proposal which basically would have borrowed $3 trillion in the bond market to make the mother of all ponzi trades by assuming a positive carry with higher returns in the stock market. I'm somewhat convinced it would have worked for a while- you don't cram $3 T into stocks without some effect, but in my mind the effect of taking us from the far orbit of financial sanity into an entirely new financialized alternate universe could not have ended well in the long term.

 

"Ownership society" did sound good to a lot of folks although the real name should have been the "Ponzi Carry Asset Inflation Society."

 

When the discussion was opened up after that proposal fizzled the resulting debate was disappointing from both sides.

 

But what the article describes could quite possibly have something to offer if there was ever a reasonable discussion on the matter. Of course it would either have to be phased in over a long period of time or you'd have to issue the $3T in bonds to pre-fund it, though.

 

The big problem is that it doesn't work in a ZIRP world- there is no safe return to be found. And that brings us to the heart of the problem- we've underpriced interest rates for 20 years with the explicit intention of forcing the price of all assets higher. Which is the root of the historic wealth inequality that we see today.

 

Now that the world is leveraged against those inflated asset values and interests rates are nil I'm having a hard time seeing the way out.

schnurrbart
Veteran Advisor

Re: Alternate social security plan

The govt employees haven't been in SS since 1982.  Since I hired in before that, I stayed in CS but still didn't pay into SS.  All teachers that I know of don't pay into SS but into their own private retirement with the state and/or county.  It is all tied to the stock market and if it is way down on the day you retire, you're screwed.

schnurrbart
Veteran Advisor

Re: Alternate social security plan

Retirements are all different.  UPS and USPS are in the virtual same business.  When a USPS employee retires at the usual minimum of 20 years (civil service old employees that hired in before 1982), he averages 56%.  When a UPS guy retires, he gets $100 per month for each full year he worked.  Someone with 26 years service would get $2600/month with UPS but with USPS he would get a little less than $2000/month.  In addition to that, the UPS guy never walked more than 30 yds at one time in his entire career while I averaged about 50 MILES a week!!

schnurrbart
Veteran Advisor

Re: Alternate social security plan

I only paid $56-57K into SS and at the rate I am getting it, I will be 81 before I break even.  But by my 82d birthday, I will living off of you, ollie, ba and 3020!  Yeah, it is a great deal!

bruce MN
Advisor

The trouble that Bush had....

....was by the time it came up there weren't two people in the country other than his wife who trusted him an iota and she only did because by then she knew he was benign.

 

I''m not a big booster of stock indexes being a reliable indicator or barometer of the general  health  and vitality of either the economy or the Republic but as for that, if, as apparently is so for 3020 and his disciples here....it's a good thing we made "the change":

 

 

 

 http://krugman.blogs.nytimes.com/2012/03/15/taking-stock/

kraft-t
Senior Advisor

Re: Well if it's such a great deal

Why not have government borrow a trillion dollars and invest it and use the rewards to pay off the debt. Come on conservatives. You've had congress the senate and the white house. Why haven't you solved all our budgetary problems. Instead you chose to invest the trillions in tax cuts for your rich buds leaving the government short on revenues and trillions in debt.

Red Steele
Veteran Advisor

Re: Alternate social security plan

What country was it in that the fascists kept you from quiting the post office job and going to work for UPS?