Why Is Bush Holding Up Galveston, Matagorda, and Brazoria as Good Examples?

Everything I've seen says that their numbers are not so good.

Think Progress Reports:

The Texas Privatization Plan:: Sen. Barbara Boxer (D-CA) took the president up on the "Texas idea" suggestion. The senato's office has released a report looking at the 1981 Texas plan. In 1981, three Texas counties "decided to opt out of Social Security and instead to provide their public employees with a system of privatized accounts." The analysis done by Boxer's office and the nonpartisan Congressional Research Service "compares two sets of families in three different income brackets [and] shows what happens to their retirement in 2005 under Social Security and under the Texas plan." The conclusion: "By examining the actual system in place in Texas, this study shows that Americans are worse off with privatized accounts - not in theory, but in reality."

Comments

[theCoach]

This is all well and good, but it really ignores the more serious issues. If three texas backwaters do something it has about zero impact on the macro economy. If you start playing around with the half the money in Social Security it becomes a whole different thing altogether.

[Ken Houghton]

If three Texas backwaters can't make the experiment work, it is even less likely to succeed on a larger scale.

[Neil S.]

This report is based on carefully selected examples (married with a never-working spouse) designed to prove a point. Would have been interesting to see the results for two income families, or singles. One can select examples (or reports) to prove almost anything...but I'd rather see something of substance.

[pgl]

Gov. George W. Bush was convinced by the Cato crowd that there is a free lunch. He does not listen to those who would say otherwise. The Cato crowd has likely told Bush only about the winners in Chile or in Galveston and nothing else. Our gullible President alas listens to the snake oil salespeople and not his economic advisors.

[Ottnott]

Yes, the Boxer study is terribly flawed, Patrick. It neglected to subract 3% per year from the private accounts, as the Bush plan would do.

[liberal]

I thought the problem with comparing to examples of groups opting out of SS is that these groups typically aren't financing the so-called legacy debt (i.e., lack of prefunding in SS). So comparisons with SS are not fair to the latter.

[Brian]

I heard a woman on C-Span the other day from Plano, Texas, who said that her private account more than double since she started investing in it twenty or thirty years ago. If she's living in one of the three Texas counties, she's definitely an anomoly.

Anyway, let's hope that some columnist gets out in front on this matter and sets the news cycle before the Republicans. Paul Krugman, you awesome economics guru you, I'm looking in your direction.

[wkwillis]

I wonder if they are counting a worker who isn't in social security who has spousal social security provided by a spouse who is in social security.
Those counties should have been subsidized by the rest of the US, since one spouse in the civil service or the military and one spouse in a social security covered job has always been a good deal.

[Barkley Rosser]

The question has arisen as to who "got to Bush" about privatization, much less these Texas counties. It is not Cato, as they did not get into SS privatization until Ferrara started kicking around in the early 80s. Bush supported privatization in 1978 when he ran for Congress. As a reformed alcoholic he has obsessive-compulsive tendencies (see his war in Iraq) so that if he gets something in his head, it stays there forever no matter what. One informed speculation I have heard out of Cato is that it was de facto libertarian former Congressman Ron Paul who initially got to Bush back in 1978.

[theCoach]

Ken Houghton,
Not sure if it came across, but that was my point. A privitization plan in the past had many more advantags than we do now, at least with the projections used to claim SS is in crisis. The other point, though, is that a massive privatization plan will have unknowable effects on many different areas that are simply not factors in small time privatization schemes.

[Neil S]

nmg,
It's really not terribly complicated...
-Means test benefits (using a slope, not a cliff)
-Raise retirement and early retirement ages to reflect changing life expectancy
-Increase minimum payments
-Modify tax rates each year as needed to balance the system
-Freeze the silly trust fund at current levels in perpetuity

Something for everyone to hate...

[anne]

Brian

"I heard a woman on C-Span the other day from Plano, Texas, who said that her private account more than double since she started investing in it twenty or thirty years ago."

Notice the interesting comment. An investment in long term Treasury notes for the last 10 years would have increased 135.8%. To double an account in 20 or 30 years, with no cost of living adjustment for the returns, is thoroughly awful for a private account.

[anne]

What should be surprising and revealing is the poor investment return from 1981 when the Galveston private pension program was formed till now.

[anne]

Notice the Galveston plan is considerably more costly than Social Security [12.4% to 13.8%]:

http://www.nytimes.com/2005/03/18/politics/18texas.html?ei=5070&en=55ee03e8bad32003&ex=1115265600&pagewanted=all&position=

On Texas' Coast, a Laboratory for Private Accounts
By SIMON ROMERO

GALVESTON, Tex. - As governor of Texas, George W. Bush had an up-close look at what many advocates of individual Social Security investment accounts consider a laboratory for how such a system might work: Galveston County's retirement system.

In 1981 officials in Galveston, a seafront city on the Gulf of Mexico opted out of Social Security along with neighboring Brazoria and Matagorda Counties and chose instead to plunge their county governments into the unknown territory of offering private retirement accounts.

Hundreds of employees in these counties have since retired under the system and more than 4,000 current employees make deposits into their private accounts each month.

But there is intense debate over what lessons to draw from Galveston's experience and whether a government retirement system should help adjust income disparities.

Some prominent retired officials swear by the system, saying it has allowed them to retire richer than if they had stayed with Social Security.

"You basically get back what you put in," said Ray Holbrook, 78, a former county judge who retired in 1995. Mr. Holbrook had been an early supporter of the plan.

Others, mainly retirees with lower income, have found their small nest eggs eroded by inflation or gone altogether after choosing a lump-sum payment instead of monthly checks.

"I don't know what I would do without Social Security," said Norma Samuels, 61 , a retired food services manager who took the $22,000 she had put in her account over eight years as a lump-sum payment because her husband had died and amassed unpaid medical bills.

Ms. Samuels still receives Social Security through survivor's benefits and is waiting to collect her Social Security benefits from a previous job when she turns 65. The Galveston plan also includes survivor and disability benefits that sometimes exceed those of Social Security....

[anne]

http://www.nytimes.com/2005/01/27/business/worldbusiness/27pension.html?ei=5070&en=9a93e4fd98d5a7ab&ex=1115179200&pagewanted=all&position=

Chile's Retirees Find Shortfall in Private Plan
By LARRY ROHTER

SANTIAGO, Chile - Nearly 25 years ago, Chile embarked on a sweeping experiment that has since been emulated, in one way or another, in a score of other countries. Rather than finance pensions through a system to which workers, employers and the government all contributed, millions of people began to pay 10 percent of their salaries to private investment accounts that they controlled.

Under the Chilean program - which President Bush has cited as a model for his plans to overhaul Social Security - the promise was that such investments, by helping to spur economic growth and generating higher returns, would deliver monthly pension benefits larger than what the traditional system could offer.

But now that the first generation of workers to depend on the new system is beginning to retire, Chileans are finding that it is falling far short of what was originally advertised under the authoritarian government of Gen. Augusto Pinochet.

For all the program's success in economic terms, the government continues to direct billions of dollars to a safety net for those whose contributions were not large enough to ensure even a minimum pension approaching $140 a month. Many others - because they earned much of their income in the underground economy, are self-employed, or work only seasonally - remain outside the system altogether. Combined, those groups constitute roughly half the Chilean labor force. Only half of workers are captured by the system.

Even many middle-class workers who contributed regularly are finding that their private accounts - burdened with hidden fees that may have soaked up as much as a third of their original investment - are failing to deliver as much in benefits as they would have received if they had stayed in the old system.

Dagoberto Sáez, for example, is a 66-year-old laboratory technician here who plans, because of a recent heart attack, to retire in March. He earns just under $950 a month; his pension fund has told him that his nearly 24 years of contributions will finance a 20-year annuity paying only $315 a month.

"Colleagues and friends with the same pay grade who stayed in the old system, people who work right alongside me," he said, "are retiring with pensions of almost $700 a month - good until they die. I have a salary that allows me to live with dignity, and all of a sudden I am going to be plunged into poverty, all because I made the mistake of believing the promises they made to us back in 1981." ...

[sarah]

Geez-Louise! Neil S. did you LOOK at the report? 'Carefully selected' indeed! Low, median and high income, plus one (so conveniently forgotten by the Bushies) 'survivor benefits' case. At age 65, only the high income case comes out ahead, and by age 80 all THREE are losing out. Of course (surprise, surprise the low income loses the most...

[anne]

Sarah

What is surprising is that the Galveston program was begun in 1981 and has extended through the finest possible 25 years of stock and bond returns. Surely such returns are more than disappointing.

[Kaleberg]

The Boxer report looked pretty fair to me. They assumed a 7% long term return from treasury bills which matches the long term rate of return that one expects from stocks. Does anyone know how mutual funds have been doing over the last 40 or so years? That would probably put an upper bound on what a private investor should expect to do modulo management fees and tax issues.

Of course, it always helps to remember that Social Security is just our society's way of obeying the 5th Commandment which enjoins us to honor our parents. Goods and services for the elderly have to be provided by active workers. George W. Bush is correct in that he argues that there is no intrinsic way to store accumulated value.

What is generally ignored is that the 2:1 worker to elderly ratio will probably lead to soaring productivity which will make the burden surprisingly easy. Only 10% of our current work force is really needed to produce our food and provide our manufactured goods. This leaves a lot of slack in place. If we halved our work force, we could probably eliminate an entire echelon of middle managers.

[Ralph]

Some California municipalities such as San Jose also opted out of social security at about the same time as Galveston. Wonder if there are studies floating around of their experience.

[anne]

The system that strikes me as most attractive is rarely mentioned for it is costly, and that is Sweden. The full article can be found searching Brad's blog:

February 5, 2004

Some lessons from Sweden on the pros and cons of privatizing Social Security.
By Alan B. Krueger - New York Times

[anne]

http://www.j-bradford-delong.net/movable_type/2005-2_archives/000012.html

February 5, 2004

Some lessons from Sweden on the pros and cons of privatizing Social Security.
By Alan B. Krueger - New York Times

"YOUNGER workers," President Bush said in his State of the Union address, "should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account."

According to former Treasury Secretary Paul H. O'Neill, the president believes that the reason he was elected was his bold -- some would say risky -- stance on replacing part of Social Security with personal accounts. If the president holds onto office in November and his party continues to hold Congress, the creation of some sort of personal retirement accounts as part of Social Security seems likely.

Although it is impossible to know what form such accounts might take, in 2000 Sweden instituted a system of personal accounts that holds many lessons for any country seeking to reform its retirement system.

Sweden now has a blended system, an approach Mr. Bush apparently favors. Employers and employees contribute a combined 16 percent of payroll toward a "pay as you go" retirement system like Social Security, and an additional 2.5 percent toward individual retirement accounts. Those born after 1954 are fully in the new system, while older workers are phased in....

[Josiah Bartlett]

The question has arisen as to who "got to Bush" about privatization. It is not Cato,it was not de facto libertarian former Congressman Ron Paul. It was fed to him on a silver spoon from his birth. A steady diet of vitriol toward all things FRD and the lazy poor people. If they weren't lazy, they would have been born rich.

[ktheintz]

Heh. From the title, I thought this post was about refineries, the environment being another area where Bush wants America to look like the Texas Gulf Coast.

[RT]

What Anne said about Galveston and the market: any private investment plan that primarily involved the years 1982-99, when the US stock market had its greatest ride ever (from 776 to over 11,000), SHOULD have done remarkably well, and should be ridiculed if it didn't.

[ChasHeath]

RT - that's correct, but the Galveston plan only invests in fixed income.

Fixed income also had one of the best rides in history from 1982 till now. It is quite likely that anyone entering the Galveston plan today, where we have historically low fixed income returns and rising inflation, won't come close to matching the benefits payable to the group in the plan from 1982 to date.

[Neil S]

Sarah,
Yes, I read the entire report. By carefully selected, I was referring to the fact that only single income households with a spouse who had no earnings history were selected. Two income households and singles were not considered.

***Disclaimer*** I have no data here, speculation follows***

I believe that enrollees in the plans which meet the criteria in the study are a minority of the enrollees. Further, I believe that the data for two income households and singles might lead to a very different conclusion, as I believe that single income familys are among the most favorably treated groups under the existing SS plan.

I welcome any data which would help to shed light on these points.

Regards,
Neil

[Jimbo]

The amount of ignorance on this subject is astounding.

(1) The Galveston plan included only fixed annuities as investments. Had they had a balanced stock-bond portfolio, benefits would have been much larger.

(2) Social Security benefits look good to "privatization" only because Social Security is a system of promising more today than you can justify by what's coming in tomorrow. This is known as a Ponzi Scheme when private financiers do it. When government does it, it's called "rock solid"

(3) Individuals should have the option to opt-out just like Galveston did and invest in diversified mutual funds that have a minimal amount of equity exposure.

(4) The President's plan is not a good plan, I admit. Individuals should be able to take their entire 12.4% combined FICA tax and invest it in diversified funds.

(5) Social Security benefits have been determined by the Supreme Court to be merely promises. That means that as opposed to private accounts with your name on it, Social Security is just a promise. You may think you're getting a better deal than private investments -- and maybe it turns out that way. But 3 months before you retire, the government can wipe all or part of it out. That can't happen with your own savings accounts.