Date: Wed, 15 Dec 2010 09:34:10 -0500
From: Keith Brainard
To: Gardner Selby <wgselby@statesman.com>


Gardner: I’ll try to sum up my comments, and I’m happy to discuss if you wish.

 

With respect to this statement:

 

“In 1981, Matagorda, Brazoria, and Galveston Counties all opted out of the Social Security program for their employees. Today, their program is very, very well-funded and there is no question about whether it’s going to be funded in the out years."

 

·         The statement is factually correct. The Alternate Plan is a defined contribution plan, like a 401k, in which benefits are a function solely of contributions and investment earnings. Under the rules of the plan, the obligation of the employer or taxpayer ends with the contribution. By definition, the plan is always fully-funded because the plan is obligated to pay out only as much as it collects.

·         The Alternate Plan lacks three important features that are part of Social Security: a minimum benefit for lower-income workers; protection from inflation; and required annuitization, meaning that participants must receive at least some of their benefit as a lifetime income stream, rather than as a single lump-sum.

·         The Alternate Plan contains elements that may be appealing in a retirement plan. For example, as the governor states, the plan is always fully-funded, and the long-term cost of the plan is clear and certain. Also, unlike Social Security, Alternate Plan participants own their retirement assets, rather than being entitled only to a monthly benefit for the remainder of their lives.

·         The basic difference between the Alternate Plan and Social Security is that the former is a retirement savings plan that provides benefits based on contributions and investment performance, while Social Security is an insurance plan intended chiefly to prevent stark poverty in old age. Social Security promises a certain level of benefits based on salary and other factors, with a minimum benefit for lower-income workers and a maximum for higher-income workers.

·         Both plans present relative advantages and disadvantages, and an argument could be made for providing elements of both plan types for all working Americans.

·         The Alternate Plan model would need to be modified to incorporate the three elements listed above if it was to replace the current Social Security plan. Social Security has promised more in benefits than it is projected to collect, so adjustments will need to be made to Social Security benefit levels, contribution rates, or both, for the plan to continue to pay promised benefits.