Thursday, September 15, 2011

Social Security v. the Galveston Plan: the Privatization Debate Redux

PolitiFact is providing some important reporting on a claim being made by some of the GOP Presidential hopefuls:

"The city of Galveston, they opted out of the Social Security system way back in the '70s," Cain said. "And now, they retire with a whole lot more money. Why? For a real simple reason -- they have an account with their money on it. What I'm simply saying is we've got to restructure the program using a personal retirement account option in order to eventually make it solvent."


Oh boy – it sure sounds like Herman Cain is arguing that privatization will lead to a better return than the current system. Theresa M. Wilson a few years ago did a comparative analysis of the two systems and noted that the Galveston strategy of investing retirement funds is conservative much like that strategy of the Social Security Trust Fund. In fact, the Galveston real return on its investments was only 4.62 percent over the 1981 to 1997 period as compared to a 4.88 percent return for Social Security funds over the same period.

So how can it be that the Galveston plan gave some participants more retirement funds? Well perhaps it is due in part to the fact that this plan is a defined contribution plan whereas Social Security is a defined benefits plan. As PolitiFacts notes:

participants who had higher earnings and fewer or no dependents generally fared better under the Galveston plan, particularly over the near term. But workers with lower earnings and more dependents tend to receive more money under Social Security ... "It's a great plan if you have worked under the plan for many years, if you do not die and leave any dependents, if you are not divorced from someone covered in the plan and if you are not interested in having your retirement income stream protected against inflation," said Eric Kingson, a professor at Syracuse University's School of Social Work and a longtime skeptic of the plan. "Short-term workers who leave the plan receive little if any benefits for their work and do not have their years under the Galveston Plan covered by Social Security. Low-income working persons do not receive anything approaching the kind of protection they receive under Social Security."


It does appear that the Republican candidates for President want to return to the 2005 lies about how Social Security is inferior in every respect to defined contribution plans. I guess we have to relive this unfortunate debate.

10 comments:

one2emu said...

"So how can it be that the Galveston plan gave some participants more retirement funds? Well perhaps it is due in part to the fact that this plan is a defined contribution plan whereas Social Security is a defined benefits plan."

That is the philosophical dilemma, there those who believe that one is entitled to only what they contribute (Nothing more Nothing Less, Guaranteed!), i.e defined contributions. There other school is that of, one is entitled to the maximum benefits regardless of whether they contribute or not i.e defined benefits.

-one2emu

Bruce Webb said...

I am not sure that is a good depiction of what 'defined contribution' means.

The contribution in question is typically that of the employer, which may be matched on not by the employee, and the ultimate return dependent on actual market results. That is if anything the process is somewhat severed from "what they contribute" if indeed the worker contributes anything. (This may trigger the old discussion about whether benefits are just another form of wage compensation that would be offset dollar for dollar in the form of wages if they did not exist. Lets just say I don't find that convincing.

And as to 'defined benefit' it to has no direct contribution to employee contributions in that the pension may well be earned with no actual match (trigger ditto). Indeed the argument may reverse itself in that the years of vesting and the formula based on work years could be said to be a de facto contribution with the difference between that and DC being the fixed rate of return.

As to Galveston. In an exchange with Eric Kingson I pointed out that the most cited defense of Galveston was published by NCPA by a certain Roy Holbrook. It turns out that this 'analyst' also was the Chief Executive of the County that implemented Galveston and oversaw the whole process. He was also one of the top and perhaps actually the top earner covered by the program. Which point was only revealed by inference in the substance of this piece and may have influenced Judge Holbrook's judgement about customer satisfaction. After all the Plan he largely designed worked out great for him.

blissex said...

As usual the big deal is whether OASDI is regarded as a savings plan where the parasitic poor exploit the productive rich by STEALING THEIR PROPERTY by getting more than they paid, or as assurance/insurance against becoming poor and old instead of dying young or rich, where those who die young or rich don't get a proportional return on the assurance/insurance premiums they paid, just like those who insure against flooding and don't get a proportional return if they don;t get flooded.

The Galveston plan is a savings plan, and OASDI is an assurance plan, and they cannot be compared.

BTW, returns on savings always be quoted as after-inflation and risk-adjusted (and historical returns aren't), and it should be always kept in mind that:

* It is exceptionally difficult to get long-term, after-inflation, risk-adjusted investment net returns as high as 3%. Getting 1-2% is already pretty good.

* It is essentially impossible for most people in a country to get risk adjusted savings returns higher than nominal GNP (not GDP...) growth, unless there are very undesirable circumstances (the proportion of GNP going to rent increases all the time, or most of the savings are invested abroad in higher growth countries).

blissex said...

Also, the politics of the situation are always the same: conservative strategy is to point out to the "middle class" that their interests are aligned with those of the "upper class" against the exploitation by the lower class parasites.

So that the Galveston plan being a savings plan and not an assurance/insurance pool seem to them like a feature precisely becase «Low-income working persons do not receive anything approaching the kind of protection they receive under Social Security», because every gullible and mean middle class voter is sure of being a winner and running no risk of becoming poor or living too long.

Fundamentally the politic argument against assurance/insurance is self selection: the middle classes believe in their heart that they will never need to assure/insure themselves against bad outcomes, until those happen.

Don Levit said...

Blissex:
You seem to be using assurance and insurance interchangeably.
I guess that means you think they are basically the same.
Actually, Social Security is neither a defined benefits plan nor a defined contribution plan, according to the FASAB, the accounting advisor for the federal government.
In a paper entitled "Accounting for Social Insurance, Revised:"
Page 85 "Social insurance is not an employee benefit. The accounting methods for employee retirement benefits reflect the fact that employees voluntarily exchange lower wages during their working years to receive certain future benefits (the Galveston plan). Such an exchange does not occur with social insurance benefits."
Page 87 "A nonexchange transaction arises when one party receives value without directly giving or promising value in return. In regards to social insurance the federal government gives values to beneficiaries WITHOUT RECEIVING VALUE IN RETURN. The fact that benefits paid are not based on the amount of taxes paid confirms the nonexchange nature of social insurance."
www.fasab.gov
Click on Exposure Drafts and Documents for Comment
Don Levit

blissex said...

OASDI seems to be a (voluntary) assurance plan (against the risk of becoming too old) with an insurance element (against the risk of becoming too poor).

Those people who choose to purchase OASDI products get the assurance of an annuity and insurance against getting too small an annuity if they become poor or sick or disabled at the cost of getting a smaller annuity if they don't.

It seems that many of them think it is good value; it is the kind of assurance + insurance product that Madoff style guys cannot steal.

Ayn Rand collected OASDI herself.

blissex said...

«In regards to social insurance the federal government gives values to beneficiaries WITHOUT RECEIVING VALUE IN RETURN»

That's a bizarre statement, because the beneficiaries of OASDI even reimburse the federal government for administering OASDI, so the federal government does not spend a dollar on social insurance, and neither gets a dollar of income from it.

Unless this is means to include Dubya's Expensive Gift to Republican Voters and Donors (Bushcare part D), which is indeed a transfer of value from the government to constituents of mostly one specific party.

«The fact that benefits paid are not based on the amount of taxes paid confirms the nonexchange nature of social insurance.»

And by the same reasoning that is true of any insurance products where if one never suffers the adverse event one does not get a dollar back, and viceversa, if one suffers the adverse event one gets much more than was paid in. In insurance it almost never happens that for any given individual the benefits paid are not based on the premiums paid.

Don Levit said...

From the FASAB:
In regards to social insurance the federal government gives value to beneficiaries WITHOUT RECEIVING VALUE IN RETURN.
It does, indeed, seem bizarre, Blissex, but this is the disconnect between how the federal government views social insurance and how you and I would view it.
Here, because the contributions are taxes and not premiums or savings contributions, the federal government can spend those taxes for the "general welfare." If that means paying future benefits (after the current year), the government is, in a sense, doing us a favor!

Benefits are not based on the amount of taxes paid. Many people consider their taxes paid as a sort of "vesting" for benefits. In a sense, that is true, as long as 40 quarters are paid in.
But, the actual benefits are based on earnings history, not taxes paid. Benefits could be paid even if there was no FICA tax.
Don Levit

Abdullahel Kafe said...

Great post. Its very interesting and enjoyable. Its must be helpful for us. Thanks for sharing your nice post.
disable people

Abdullahel Kafe said...

Wow, Excellent post. This article is really very interesting and effective. I think its must be helpful for us. Thanks for sharing your informative.
mentalist