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"A Safe Alternative to Social Security:" A Commentary

By Dr. Merrill Matthews, Jr.

Dallas, TX – Both Republicans and Democrats are gearing up for a fight over President Bush's campaign proposal to let workers place a portion of their Social Security payroll tax into a personal retirement account.

Considering the recent volatility of the stock market, the first question that will have to be answered is whether such accounts can be safe from huge market swings. Well, the answer to that question is yes. Thousands of county employees in Galveston and two other Texas counties opted out of Social Security in 1981 and '82. They have had personal retirement accounts for 20 years and never lost a dime. Even when the stock market was tanking last year, those county employees made money.

How? Instead of using an "IRA model," in which their Social Security retirement savings are placed in stocks or mutual funds that go up and down with the market, they use what might be called a "banking model." A small financial management company takes the money that would have gone to the Social Security trust fund and bids it out to a top-rated financial institution, which pays a guaranteed interest rate. Depending on the market and the economy, those interest rates have varied over the past 20 years from about 5% up to 15%, but average about 7.5 to 8%. As a result, these county employees retire with two to three times more than they would have received under Social Security.

It is important to note that these county employees are not rich, sophisticated investors. They are middle and lower-middle income workers, and many are union members. Since the counties are in South Texas, many of the employees are minorities. These workers don't make investment decisions themselves. Their Social Security money goes to a financial institution that gives them a guaranteed interest rate - just like a bank. And for all intents and purposes, the money is as safe as if it were in a bank.

But that's not all. Social Security pays a deceased worker a death benefit of $255, and in some cases a survivors' benefit. By contrast, these counties provide a life insurance policy that pays three times a deceased worker's salary, up to a maximum of $150,000. And that amount is doubled if the worker dies accidentally. Of course, since the retirement account belongs to the worker, that money goes to the family, regardless of when a worker dies. Finally, in 1999 the U.S. General Accounting Office compared the disability benefits under Social Security to those in the three Texas counties. It found that, in most cases, disabled county workers get about twice what they would get under Social Security.

Is there a way to have personal retirement accounts that are as safe as a bank account and still provide better retirement benefits than Social Security? Yes, and it isn't a dream or a risky scheme. Thousands of Texans already have them.

Dr. Merrill Matthews Jr. is a visiting scholar with the Institute for Policy Innovation in Dallas.