Texas Gov. Rick Perrys Social Security solution is to return the sponsorship… (Craig Ruttle, Associated…)
Misinformed and mendacious attacks on Social Security have become such familiar conservative shibboleths that it can be hard to muster the energy to beat them down anymore.
Then along comes Rick Perry, the Texas governor. He's suggested that it's unconstitutional (a notion the Supreme Court disposed of in 1937) and after announcing his candidacy he called it a "monstrous lie."
Perry's solution is to return the sponsorship of government retirement programs to the states, which he insists can handle the job better than the federal government.
As evidence he points to an alternative retirement plan set up by Galveston and two other Texas counties in the early 1980s, when they withdrew their employees from Social Security. (Congress later closed the loophole that allowed localities to do so.)
"Employees in those plans are reaping the benefits," Perry says in his 2010 book "Fed Up."
Like almost everything Perry says, this statement demands close scrutiny. The Galveston plan provides some benefits similar to Social Security, including pension and disability payments, but it doesn't resemble the federal program and falls well short of its protections in important ways. In fact, its designer, Houston benefits consultant Rick Gornto, told me: "I didn't set out to compete with Social Security."
The Galveston program is basically a 401(k)-style defined contribution plan. You get out of it what you put in, along with the employer's match and investment gains on the total.
That means the greatest benefits flow to the best-paid employees, such as the county managers who established the plan. Social Security, by contrast, steers proportionately larger benefits to moderate- and low-paid workers.
Fans of the Galveston plan say that at almost any income level, its members make out better in retirement than under Social Security. (The contribution rates are similar, though Galveston contributions are in pre-tax dollars, so the benefits are fully taxable in retirement; Social Security contributions are in after-tax dollars, but the benefits are only partially taxable.)
But not all the Galveston plan's retirees are as delighted as Perry makes them out to be.
"What they promised with that plan, it did not deliver," says Evelyn Robison, 71, a former Galveston County court clerk who accumulated 20 years of credits under the plan before retiring in 2003. She says that before voting to accept the changeover, employees were plied with visions of 10% annual returns on their contributions. (The actual guaranteed minimum is about 4%.)
Gornto, the plan designer, provided me with sample retirement projections for employees at various income levels, and they show quite generous returns for most workers — on the surface.
For example, he projects that a county employee retiring with a $75,000 salary would have accumulated over a 40-year career a pension nest egg of about $740,000, counting contributions, the employer match, and earnings on the account averaging 4% a year.
That would provide a payout of $4,470 a month, he says. Sounds pretty good, considering that the maximum monthly Social Security benefit, including a 50% spousal bump up for couples, is about $3,550.
Except that Gornto's figures assume that a worker retiring with a $75,000 salary made that very amount every year for 40 years, which obviously would not be the case.
If one assumes instead that the worker reached $75,000 after receiving raises averaging, say, 2% a year, my back-of-the-envelope calculation yields a nest egg closer to about $463,000, which would yield a monthly payout of less than $2,800, using Gornto's formula.
Moreover, Gornto's projected payout lasts only 20 years. After that, the worker receives nothing. Social Security, by contrast, pays for life.
"What happens after those years are up and you still want to have a roof over your head?" asks Robison, the Galveston retired court clerk.
Unlike Social Security recipients, Galveston retirees don't have inflation protection. (Inflation has been quiescent over the last few years, so there haven't been cost-of-living increases for Social Security lately, but plainly that's not a permanent condition.)
That's a huge drawback of the Galveston plan. After 15 years of inflation at 3% annually our sample retiree's $4,470 would have the buying power of about $2,830; after 20 years it would be down to $2,431 — a reduction by nearly half.
Run into a period of double-digit inflation, such as what prevailed in the early 1980s when the Galveston plan was created, and the impact would be even more devastating.
All these niceties help explain why the two most detailed comparisons of the programs, performed in 1999 by the General Accounting Office and the Social Security Administration, concluded that the Galveston plan would be a poor substitute for Social Security for the vast majority of workers and their families. That's especially true when you factor in survivor and dependent coverage.