Social Security and both public and private sector pension funds are in serious trouble. The Social Security retirement program has been running deficits since 2010, and its trust funds will be empty by 2036. Unless Washington finds more revenues (a.k.a. taxes), the Old-Age and Survivors benefits offered by Social Security will be cut 23 percent by 2035, and disability benefits will be cut 11 percent by 2021. Additionally, state and local government pensions, in the U.S., are dealing with $3.412 trillion in unfunded liabilities, and private sector pensions are struggling as well. So, if you are retired, or you hope to be retired some day, then this information should be of interest to you.
According to the Heritage Foundation, Social Security and Medicare need $50 trillion today if they are to be fully funded in the future. The annual GDP, for the US, is around $18 trillion, so fully funding these programs will not happen. In fact, current estimates show that the combined cost of Social Security, Medicare, Medicaid, Obamacare subsidies and interest payments on the national debt will consume all of the federal government’s revenue within 16 years. This will leave nothing for other government spending, including national defense, and no progressive tax scheme can stop this trend.
Both private and public sector pension funds are also facing some tough choices. One example is state level pension funds are struggling with a $1 trillion shortfall while the gap between assets and liabilities is growing exponentially. Another example is the Central States Pension Fund. Earlier this year, the US Treasury rejected a petition by the the Central States Pension Fund to cut benefits by 23 percent. The cuts are needed because Central State is facing insolvency within 10 years. Central State is one of the largest private sector pension funds and covers both union employees and retirees from more than 1,500 companies. The principal reason the Treasury rejected the request was because the proposed cuts were not enough to avoid insolvency.
All these problems have been anticipated for some time, but little has been done to avoid them and only a few states have taken matters into their own hands by implementing alternative plans based on models different from traditional pensions and Social Security. Most of the alternative approaches are similar to the one implemented in Utah which utilizes IRA and 401(k) plans as their solution. These plans rely mostly on stock market investments which can be very problematic during a bad economy, and stock market risk is the principal criticism of these plans.
But, there is a better solution to the problems facing Social Security and pension funds. It is a private sector approach that provides a reliable and cost effective alternative—an alternative that offers more than twice the retirement benefits of Social Security and provides disability benefits which are easier to access than Social Security Disability Insurance (SSDI), and it pays up to 850 times more in death benefits. This solution requires no government bureaucracy nor unfunded liabilities (deficit spending), and the assets from this program are owned by each participant not the government. It is a solution that has a 35 year track record. It has survived the stock market crash of 1987, the Dot Com bubble of 2000 and the housing market crash of 2008, and it remains solvent and viable today. This solution comes to us courtesy of the Lone Star State of Texas.
In 1981 and 1982, Galveston, Matagorda and Brazoria counties, in Texas, opted out of the Social Security program. They replaced Social Security with a plan developed by a man named Rick Gornto. Mr. Gornto is the president of First Financial Benefits, Inc., in Houston, Texas, which is the company that manages this program known by the innocuous name, The Alternate Plan.
To put things in perspective, we can compare the Alternate Plan with Social Security. But, to make this comparison, I have used sources that are a few years old, so don’t get too excited if my numbers are off a bit. The essence of this comparison and contrast is still valid.
Under the current Social Security system, workers contribute 12.4 percent of their income through FICA payroll taxes. Half of this tax (about 6.2 percent) is deducted from the employee’s paycheck, and the other half is paid by their employer. These FICA taxes go into the Social Security Trust Fund which then contributes a portion to the OASI Trust Fund, for old age and survivors benefits, and a portion goes to the DI Fund for disability insurance.
The Alternate Plan is funded in a similar fashion. In Matagorda and Brazoria counties, employees contribute 6.2 percent of their income and the county matches that amount for a total of 12.4 percent. In Galveston county, employees contribute 6.1 percent and the county contributes 7.8 percent of the employees income for a total of 13.9 percent. But, this is where the similarities end.
The money paid into the Alternate Plan is pooled by First Financial Benefits which then takes competitive bids, from top-rated financial institutions, for those funds. These financial institutions guarantee a rate of return that will not go below 3.75 percent. And, when the markets go up, the rate of return is higher. Historically, the plan has returned an average of 5 percent a year, and during the ’90s, the Alternative Plan saw returns as high as 6.5 to 7 percent. If a county employee would like a higher rate of return, and is willing to take some risk, then they have the option of putting a portion of their contribution into stocks or mutual funds.
When an employee retires, they have 3 options; they can take a lump sum payout, or they can lock in a specific monthly income for a specified period of time, or they can opt for a lifetime annuity; the annuity pays a slightly lower benefit, but it offers the advantage of lifelong payments.
Under the Social Security program, a worker, earning $26,000 per year at retirement, could expect about $1,007 per month. But, the Alternate Plan, according to First Financial’s calculations, would pay $1,826 per month. A worker earning $51,200 could expect about $1,540 per month from Social Security, but $3,600 per month from the Alternate Plan. High income workers who have maxed out their Social Security contribution every year, could expect about $2,500 per month from Social Security, but the Alternate Plan would pay between $5,000 and $6,000 per month.
Just like Social Security, the Alternate Plan provides disability insurance. And, a 1999 Government Accountability Office (GAO) analysis, comparing Social Security Disability Insurance (SSDI) with the Alternate Plan, found that there were many advantages to the private sector option.
According to the GAO report, under the Alternate Plan, workers are eligible for disability the moment they begin the program. But, under SSDI, a workers must wait 6 months, be over the age of 30 and must have worked 20 of the previous 40 months before they are eligible for benefits.
The GAO determined that low-income and disabled workers would receive twice as much in benefits under that Alternate Plan than they would receive from SSDI. And, high-income workers would receive more that twice as much over the SSDI benefit. Under the Alternate Plan, disabled workers can receive between 66 and 80 percent of their monthly income with a maximum of $8,000 per month. Under SSDI, the majority of disabled workers receive less than $1,700 per month with very few receiving the maximum of $2,800 per month.
Social Security also provides a death benefit. When you pass away, your survivors will receive $255. That’s not a miss-print or a typo; your life is worth two hundred and fifty-five bucks to the federal government, and that probably wont cover the cost of flowers for your funeral. But, the Alternate Plan takes a portion of an employee’s contribution and applies it to a term life insurance policy. This insurance policy pays four times the employee’s salary up to $215,000, and it is tax free. This is a benefit 850 times more than what Social Security pays for the same contribution.
Another important distinction is that workers in the Social Security program lose all their contributions when they die. The only exceptions are those participants with a surviving spouse that did not work and would not otherwise be qualified for benefits, and/or they left behind dependent children; these persons would qualify for a portion of the benefits. But, under the Alternate Plan, an employee owns their account, and all of their benefits belong to their estate. An individual is free to leave their estate to whom ever they wish—their spouse, their children, their dog or cat. They could even leave a generous donation to the Libertarian Party of North Dakota. Or better yet, they could leave everything to a charitable fund that provides healthcare to the poor and needy. The point here is participants are free to do as the please with their own money.
Under the Alternate Plan, once an employer makes its contribution, there is no other obligation; there is no government bureaucracy and there are no unfunded liabilities. And, the Alternate Plan has proven so successful that, since its inception 35 years ago, 53 public school districts across the state of Texas have adopted a similar plan called, The FICA Alternative Plan.
You may wonder if a program that works on a county level can be adapted on a larger scale. Well, Mr. Gornto testified before a congressional committee saying that it could easily be done. And it should be noted that while North Dakota has a population of about 720,000, the three counties participating in the Alternate Plan have a combined population of 691,000. So, what we have is a viable option that can eliminate the bureaucratic nightmare that is the Social Security Administration, save Americans trillions of dollars in squandered taxes, and drastically reduce the federal government’s intrusion into our personal lives. And, rather than siphoning tax dollars out of our economy, the money will remain in the private sector and contribute to self-perpetuating investments that will help stimulate real economic growth.
Washington has seen all these problems play out like a slow-motion train wreck, but legislators and government officials have done little to resolve the problems because establishment politicians love to use entitlement programs as a political hammer. In 2005, President Bush tried to reform Social Security with no success and a great deal of political backlash. Legislators on the left see entitlements as a political third rail; they ignore the problems while pretending that all will be well. On the other hand, conservatives only offer slow marginal changes because they fear being labeled as cold, selfish and uncaring.
As your United States Senator, I will have the courage to work for meaningful solutions to the problems that face Social Security and retirement pensions. I believe the first step is to begin the process of eliminating the Social Security Administration. This can be done by returning FICA taxes to the states in the form of block grants that can be used to fund creative solutions like the Alternate Plan. Such solutions will insure we can keep our promises made by Social Security and provide better benefits for less money without government bureaucracy and without deficit spending.