The exemption for public employees is a holdover from the original Social Security law, which excluded state and local workers when it was enacted in 1935 because of congressional concern about the legality of taxing them. Fifteen years later, the law was amended to allow local government workers the option of being part of Social Security, which many chose. Then, in 1983, the law was changed again to prevent any more state and local employees from opting out.
By then, the Galveston plan was well underway. Under the program, workers contribute 6.13 percent of their pay to private accounts, while the participating counties add 7.8 percent -- making for an overall contribution slightly larger than the 12.4 percent required by Social Security.
The money is used to buy disability and life insurance policies, which pay as much as 60 percent of workers' salaries in the case of disability and up to $215,000 in life insurance benefits. The rest of the money is invested in annuities that guarantee workers a minimum 4 percent return on their contributions before inflation (workers in Brazoria County also have the option of some stock and bond investments). Upon retirement, workers can either take a lump sum or opt for one of several annuity payouts. The transactions are handled by the plan's manager, First Financial Benefits of Houston.
"We've been through a lot in this country since 1981, and this plan has just been as stable as anything," said Rick Gornto, president of First Financial and an architect of the Galveston plan.
Plan managers acknowledge that some workers were left short on retirement income because they took hardship withdrawals from their retirement accounts (an option that is no longer permitted), by spending money too quickly once they retired or by choosing to retire too soon. Unlike Social Security, the plan allows workers to receive payouts from their accounts whenever they leave the county's employ -- an option not contemplated under Bush's proposal.
Still, Gornto said, most workers come out ahead. Projections developed by his company show that, assuming a 5 percent annual investment return over 40 years , a worker earning $25,596 a year could receive retirement benefits of $1,549 a month -- far more than the $853 a month the worker would get from Social Security on retirement. A worker earning $75,000 a year over a 40-year career would be entitled to a monthly retirement benefit of $4,540 -- nearly three times the $1,645 a month that Social Security would provide, according to the company's figures.
But those numbers do not tell the entire story. While retirement payments under the Galveston plan are fixed, Social Security builds in annual increases that not only protect participants against inflation but also allow them to keep pace with wage increases. Factoring that in, analysts have found that Social Security is a better deal for low-income workers.
Also, personal accounts are accompanied by the financial risk that comes with any private investment. In Galveston, the insurance company that handled the retirement system's annuity investments fell into financial trouble two years after the private plan was launched. County officials waited nervously for three years before they were able to recoup the money. "The system worked," Gornto said. "Nobody lost a dime."
Frank Carmona, 70, who served as a Galveston County commissioner for 20 years and then as a judge for eight years, was among the officials who approved the alternate plan. He said that the plan has done well by him but that he supported it only because he knew that Galveston workers would also be covered by the separate state pension plan that provides them with added retirement security.
Part of his reluctance to jettison Social Security stemmed from his family history. His father died in 1957, leaving his mother with three minor children to rely on the program to pull them through financially. Carmona likes knowing that similar financial guarantees are there for everyone. "It was those benefits that kept her and my three brothers going," he said. "It's a good program."
