Thursday, September 15, 2011

Social Security v. the Galveston Plan: the Privatization Debate Redux

PolitiFact is providing some important reporting on a claim being made by some of the GOP Presidential hopefuls:

"The city of Galveston, they opted out of the Social Security system way back in the '70s," Cain said. "And now, they retire with a whole lot more money. Why? For a real simple reason -- they have an account with their money on it. What I'm simply saying is we've got to restructure the program using a personal retirement account option in order to eventually make it solvent."

Oh boy – it sure sounds like Herman Cain is arguing that privatization will lead to a better return than the current system. Theresa M. Wilson a few years ago did a comparative analysis of the two systems and noted that the Galveston strategy of investing retirement funds is conservative much like that strategy of the Social Security Trust Fund. In fact, the Galveston real return on its investments was only 4.62 percent over the 1981 to 1997 period as compared to a 4.88 percent return for Social Security funds over the same period.

So how can it be that the Galveston plan gave some participants more retirement funds? Well perhaps it is due in part to the fact that this plan is a defined contribution plan whereas Social Security is a defined benefits plan. As PolitiFacts notes:

participants who had higher earnings and fewer or no dependents generally fared better under the Galveston plan, particularly over the near term. But workers with lower earnings and more dependents tend to receive more money under Social Security ... "It's a great plan if you have worked under the plan for many years, if you do not die and leave any dependents, if you are not divorced from someone covered in the plan and if you are not interested in having your retirement income stream protected against inflation," said Eric Kingson, a professor at Syracuse University's School of Social Work and a longtime skeptic of the plan. "Short-term workers who leave the plan receive little if any benefits for their work and do not have their years under the Galveston Plan covered by Social Security. Low-income working persons do not receive anything approaching the kind of protection they receive under Social Security."

It does appear that the Republican candidates for President want to return to the 2005 lies about how Social Security is inferior in every respect to defined contribution plans. I guess we have to relive this unfortunate debate.


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