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In Galveston, an Intriguing Alternative to the "Ponzi Scheme"

Gov. Rick Perry calls Social Security a “Ponzi scheme” and says people ought to control their own retirement money. But if the social safety net created in 1935 were eliminated what might take its place? In Galveston, a possible answer.

Retired Galveston County Judge Ray Holbrook at his home in Santa Fe, Texas, on Sept. 12, 2011. A public official for 28 years, Holbrook led the effort to opt out of Social Security in 1981.

GALVESTON — Gov. Rick Perry has repeatedly called Social Security a “Ponzi scheme” and said that people ought to control their own retirement money.  

But if the social safety net program created in 1935 were eliminated — something President Eisenhower once said would be a politically stupid move — what might take its place?  

Perry does not have to look far to see how a privatized Social Security plan might work. Government employees in Galveston, Brazoria and Matagorda counties have controlled their private retirement plan for 30 years. They opted out of Social Security before Congress changed the law in 1983 to prevent others from withdrawing.    

Though the private program has its critics — and some say it does not provide all of the important benefits many destitute Americans claim through Social Security — many in these counties consider their system superior.    

“It shouldn’t be a pay-as-you-go system, where children and grandchildren are paying for your Social Security,” said Ray Holbrook, a former Galveston County judge who led the charge to opt out of Social Security during his 28-year tenure. “That’s why it’s bankrupt, and that’s why Rick Perry says it’s a Ponzi scheme, which I agree with.”  

Perry lauded the Texas counties’ plans when he was promoting his book Fed Up! in 2010, and Herman Cain, also a Republican presidential candidate, mentioned the Texas example in the CNN/Tea Party Express debate last week in Tampa, Fla.  

“Governor Perry believes we need to look at all options as we discuss how to fix the current system, which as it stands is financially unsustainable,” said Katherine Cesinger, a campaign spokeswoman.  

Almost everyone agrees Social Security will need to be changed in some way to remain solvent. Under the current structure, the Social Security Administration projects that by 2036 the program will be able to meet only 77 percent of scheduled benefits.    

In 1981, when Galveston County employees pulled out of the Social Security system, the program was projected to be insolvent by 2010, said Rick Gornto, the designer of the Alternate Plan and president of First Financial Benefits, the company that manages the retirement accounts.

“People in Texas are very independent minded, and they stepped out and challenged the system,” he said.  

In the Alternate Plan, retirement benefits are a direct result of employee contributions. In each paycheck, employees contribute 13.9 percent of the their gross pay (6.1 percent from the employee, 7.8 percent from the county) to a private account. First Financial Benefits invests the accounts conservatively, Gornto said. The company guarantees a minimum rate of return of 3.75 percent to 4 percent on the accounts to safeguard employees’ benefits against inflation and severe drops in market rates.  

Employees can elect to put their portion of the contributions into riskier investments, like mutual funds and stocks, potentially to generate more interest.    

At retirement, employees in the Alternate Plan can choose to take the money in a lump sum, take monthly benefits for a given time period or take a lifetime annuity, with slightly reduced benefits. Social Security is subject to whatever rules the federal government makes, Gornto said, and there is “not a guaranteed promise to pay any certain amount.”

Critics of the Alternate Plan say it is more like a savings program than a social insurance program for all Americans, which Social Security was created to be — particularly for low-wage retirees, widowed spouses and children with deceased parents.

“People forget that before Social Security, there really were poorhouses,” said Eric Kingson, co-director of the coalition Social Security Works.

The General Accounting Office and the Social Security Administration conducted the most current comparative studies of the Alternate Plan and Social Security in 1999. The G.A.O. report noted “fundamental differences in the purpose and structure of the two approaches.”

Both the G.A.O. and Social Security studies concluded that lower-wage workers, particularly those with many dependents, would fare better under Social Security, while middle- and higher-wage workers were likely to fare better, at least initially, under the Alternate Plan.

Americans should not fear radical cuts to Social Security, Kingson said, because the program is politically protected. Americans “contribute to this system; they value it very much,” Kingson said, and they expect a return at retirement. “Any changes that are made have to be made by politicians with that in mind.”

Changing certain rules, like scrapping the cap on Social Security taxation or eliminating Bush-era tax cuts for the wealthy, would help solve the revenue shortfall, he said.

“Less and less money has been subject to Social Security taxation,” Kingson said, because most wage growth has been for high-income employees, who are not taxed for Social Security on earnings above $106,800 a year.

But proponents of the Alternate Plan say individual ownership of retirement benefits offers employees more security.

“You have some kind of control of your money, because ultimately it’s your money,” said Dwight Sullivan, the Galveston County Clerk.

Although both programs offer disability insurance, life insurance and retirement benefits, experts agree the methods and benefits provided by the programs are difficult to compare.

In a hypothetical calculation, Gornto said, an employee who earned $25,000 annually for 40 years could retire with a 20-year payout of $2,297 a month under the Alternate Plan. Under the same circumstances, an employee making $125,000 annually could retire with a payout of $11,490 a month.

Social Security benefits change depending on the yearly adjustment for inflation, the year of retirement, and the age of the worker. But at a maximum, a worker who retires in 2011 at age 66 could receive $2,366 a month in Social Security benefits.

If Congress voted to privatize Social Security, Gornto and Holbrook said they would recommend using a banking model similar to the Alternate Plan, but with one important caveat: They would suggest removing the option to withdraw funds in a lump sum.

“Most people can’t handle a sizable lump sum when they retire, and they end up spending it on a new house and new cars and everything else,” Holbrook said.

The lump-sum option is one of the biggest problems in the Alternate Plan, Kingson said, because “people end up unprotected.” If retirees do not choose the lifetime annuity, they could outlive their benefits and end up wards of the state.

Even Holbrook has outlived his Alternate Plan benefits. When he retired 15 years ago, he decided to receive $1,500 to $2,000 from his Alternate Plan account every month for 10 years. He still has plenty of good years left, but his Alternate Plan account is empty.

Fortunately, Holbrook has other savings and, ultimately, $1,300 a month in Social Security benefits from his 27 years of contributions before his county dropped out of the program.

“It was a mistake to only take it for 10 years,” he said. “It should be over a lifetime, like Social Security."

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