The Galveston Plan and Social Security: A Comparative Analysis of Two Systems

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This report presents a comparison of benefits under the Galveston Plan versus Social Security, based on different earner and family scenarios. These scenarios include single and married workers at the low, middle, high, and very high earnings levels.

Executive Summary

On January 1, 1981, the county of Galveston, Texas, opted out of the Social Security system and implemented the alternate plan (referred to in this report as the "Galveston Plan") in place of Social Security.1 The Galveston Plan has received recent attention in the press and in congressional testimony as an example of a privatized plan that could serve as a model for the privatization of Social Security.2 The purpose of this report is to compare and contrast the Galveston Plan with Social Security, and examine how certain workers with different earnings levels and family types fare under each system.

Key findings indicate that in comparison to Social Security,3 Galveston's plan does not have a waiting period for coverage (full coverage begins in the first pay period of employment); it offers more pay-out options (lump-sum or various annuities) than Social Security; and, in general, provides higher benefits to those with higher earnings and/or those with fewer dependents who would qualify under Social Security.

Furthermore, under the Galveston Plan, contribution rates (payroll taxes) are higher than under Social Security; there is a risk of outliving one's benefits under certain pay-out options (lump-sum or fixed annuity); there are no additional spousal or dependent benefits (benefits are based entirely on contributions);4 benefits are paid to a named beneficiary, and

there is no guarantee that benefits will be provided to a spouse/divorced spouse or dependent child; benefits are not portable to future employers; benefits are not adjusted for inflation; and, in general, benefits are lower for those with lower earnings and/or with a greater number of dependents who qualify under Social Security.

Whether the Galveston Plan provides a retirement, disability, or survivor's benefit that is higher or lower than Social Security's depends upon factors including the worker's earnings, time in the labor force, the age and number of beneficiaries, and the type of benefit being evaluated. This report presents a comparison of benefits under the Galveston Plan and Social Security based on different earner and family scenarios. These scenarios include single and married workers at the low, middle, high, and very high earnings levels. Earnings levels represent earnings at the following percentiles in the year 2045: low=10th, middle=50th, high=75th and very high=90th. In the case of disability and survivor's benefits, married workers are assumed to have two children (see appendix A for a full description of methodology). Findings from this analysis indicate that:

Galveston provides a higher initial retirement benefit than Social Security to single workers (without dependents

who would qualify under Social Security) at the middle, high, and very high earnings levels, and to married workers at the very high earnings level. Social Security provides a higher initial retirement benefit to lowearning single workers and to married workers at the low, middle, and high earnings levels. Because Galveston's benefits are not indexed to inflation, they lose value relative to Social Security's benefits over time.

The initial disability benefits provided under the Galveston Plan are higher for single workers at all earnings levels and for married workers with two children at the very high earnings level. Social Security offers a higher benefit to married workers with two children at the low, middle, and high earnings levels. As with retirement benefits, inflation reduces the relative value of Galveston's disability benefits over time.

In general, total benefits provided to survivors of current workers (nonelderly survivors) by the Galveston Plan are higher for workers who either do not have dependents, or in cases when dependents are present but do not qualify for Social Security. …