"In Galveston, Texas, they have allowed people to privatize part of their Social Security. And people are building wealth."

E.W. Jackson on Friday, May 11th, 2012 in a debate.

E.W. Jackson says Galveston has privatized plan in lieu of Social Security

When Republican E.W. Jackson extols free markets, he points to the gulf coast in Texas.

"Right now, in our own country, in Galveston, Texas, they have allowed people to privatize part of their Social Security. And people are building wealth," he said in a recent debate between the four Republicans running in the June 12 primary for the U.S. Senate.

We decided check out Jackson’s statement. It required two determinations: 1) Does Galveston have a private retirement plan in lieu of Social Security taxes and; 2) If so, how does the system build wealth?

The Galveston Plan

Greg Aldridge, a spokesman for Jackson’s campaign, pointed us to a number of news stories about Galveston’s alternative to Social Security. The plan has been considered as a potential model for changing the federal entitlement.

The program is an oddity in American retirement-security policy. In 1981, municipal employees of three adjoining Texas counties -- Galveston, Matagorda and Brazoria -- voted to withdraw from Social Security and initiate a system of individual accounts to provide retirement, survivor and disability benefits.

In 1983, the federal government barred any more such moves by local governments. Today, there are about 10 million Americans in the workforce who do not contribute and will not benefit from Social Security. Most of them are employees of school districts and higher education institutions that opted out before the ban.

Here’s how the Galveston plan works: Instead of paying into Social Security, county government workers contribute a similar amount to their investment accounts. The General Accounting Office wrote in 1999 that the plan made "very conservative" investments in bonds and preferred stocks.

The investments are made through fixed annuity contracts with private firms that guarantee minimum annual rates of return. While each worker is assigned an individual account, the employee does not control all investment decisions.

The interest earned on investments is deposited in each worker’s account. Employees can put extra money beyond the required amount into their accounts.

The required retirement contribution is 9.7 percent of gross pay -- of which 6.1 percent is paid by the employees and 3.6 percent by the county.

Social Security traditionally collects 12.4 percent in payroll tax on up to $106,800 in total salary, with workers and employers evenly splitting the levy. But under President Barack Obama’s FICA tax cut over the last two years, the federal government has collected only 10.4 percent -- of which 4.2 percent is paid by the worker. Social Security invests the contributions in government securities.

When the Texas county employees retire, they may choose to take the entire account’s earnings in lump sum, take monthly payments for a specified number of years, or accept smaller monthly payments in a lifetime annuity. The Galveston plan does not offer cost-of-living increases to those receiving monthly checks.

Social Security provides a lifetime annuity with annual cost-of-living adjustments. And, unlike the Galveston system, it also provides increased payment to beneficiaries with spouses and dependents.

Does it build wealth?

Jackson supports a Republican proposal that would create individual Social Security accounts and phase in investment options.  He says on his website that the proposal would "allow participants to obtain better returns on the market" than they do under the current system.

But Jackson, while extolling the Galveston plan during the debate, did not claim that it was outperforming Social Security. Aldridge said that Jackson, in saying the program was "building wealth," simply meant that individuals have ownership and some control over their retirement account.

Galveston plan designer Rick Gornto, who is president of First Financial Benefits Inc., claimed that as the major advantage to the plan.

"The key thing is you don’t have ownership in Social Security or a right to that except the right that they decide to give you, which can change," he said.

Gornto could not provide an average annual return for plan investors because each chooses a mix of mutual funds to go along with the more stable bond investments in the fund. But, he said, retirement funds must, by contract, increase annually by at least 3.75 percent or 4 percent. During good times, Gornto said employees have seen annual returns of 10 percent or better.

Does the Galveston plan outperform Social Security? The most recent studies of this question are 13 years old and provided a complicated answer.

The GAO and the Social Security Administration each analyzed the Galveston plan in 1999. They generally agreed that the higher an employee’s salary, the more he or she would benefit from the counties’ system. But middle- and low-income earners would likely collect less from Galveston plan than they would from Social Security.

We spoke to Eric Kingson, professor at Syracuse University’s School of Social Work and co-chairman of Strengthen Social Security, a group that wants to maintain benefits from the federal entitlement.  He said the Galveston program is a "savings plan, not a retirement insurance plan" that best serves a small group of workers.

"The only people who might do better are single persons who have higher incomes," he said. "Particularly for low and moderate income persons, they are not better off. If you are not married, not going to drop dead early, not leave widows or survivors and don’t want automatic life insurance for children, then it could be better."

Our ruling

Jackson is correct that Galveston, Texas, has a privately run retirement plan in lieu of Social Security. The program benefits municipal workers in Galveston County and two neighboring counties.

It’s debatable whether the Galveston plan, overall, offers workers a superior financial alternative to Social Security; in some cases it does, in others it doesn’t. But, as Jackson said, the plan  does build wealth because it allows workers to create individual retirement accounts that are guaranteed to earn interest each year. The employees have some control over their accounts and can leave them to their survivors.  

So we rate Jackson’s claim True.