Social Security Proposal, Texas Gov. Rick Perry, who has long been a vocal critic of Social Security, outlined a plan last month that he said would preserve the program “for all generations of Americans.” But one part of his plan — to let state and local government workers opt out of Social Security — could add risk to their retirements while sapping money from the system.


The proposal runs counter to the recommendations made recently by some high-profile, bipartisan debt reduction commissions, which called for shoring up Social Security, in part, by enrolling the nearly 7 million state and local government workers who are not in the program.

Perry gave a speech last month in which he called for fixing the Social Security system by, among other things, once again allowing “state and local governments to newly opt out of Social Security and instead allow their employees to pay solely into state or locally run retirement programs.”

“This has been done around the country, with better results,” Perry said. “We ought to allow it again.”

More than a quarter of state and local government workers do not participate in Social Security, though some now wish that they did. Some city workers in Central Falls, R.I., were never enrolled in Social Security, which saved both them and the city from the payroll tax that funds the program. The city filed for bankruptcy over the summer and reduced their pensions by as much as half, to as little as $10,000 a year. Now they have no Social Security benefits to fall back on.

Public-school teachers in Illinois do not participate in Social Security, and their pension fund is in precarious shape.

Perry is taking a very different approach, saying the law should be changed back to the way it was before 1983, when state and local employers were allowed to join or leave the Social Security program as they wished. Legislation passed that year prohibited public employers from withdrawing from the program once they enrolled in it.

Letting public employees out of the program is only a small part of Perry’s plan. Many of his proposals, which include gradually raising the program’s retirement age, are more common. His proposal for state and local government workers, though, comes in the midst of a national debate about the retirement benefits of public-sector workers.

The potential risk that underfunded pensions pose to both workers and local taxpayers was one of the reasons that President Barack Obama’s bipartisan debt reduction commission recommended enrolling all newly hired state and local government workers in Social Security after 2020.

Alan Simpson, who led the panel, said the group concluded that this would shore up the trust fund with payroll taxes and give workers in the most distressed pension plans something to fall back on.

Enrolling those workers in Social Security would have another benefit, the panel found: The payroll taxes that would be collected would close 8 percent of Social Security’s projected 75-year shortfall.

Perry often points to Galveston County in Texas as an example of a place that opted out of Social Security in favor of a locally run savings plan. Herman Cain has also spoken approvingly of the Galveston plan.

They have not mentioned that the Galveston program is actually more expensive than Social Security. Social Security’s contribution rate is 12.4 percent of payroll, with 6.2 percent coming from each worker and 6.2 percent coming from the employer. The Galveston plan’s total contribution rate is 13.9 percent of the payroll, with 6.1 percent coming from each worker and 7.8 percent coming from the county.

And whether it provides a better benefit is open to debate. Studies of the Galveston plan have determined that it provides a better deal for some high-income workers but a worse one for low- and middle-income workers. And its benefits are not protected from inflation.

Still, retirees there do not depend solely on that plan; they are also enrolled in the Texas County and District Retirement System, which combines features of a 401(k)-type savings plan and a traditional defined-benefit pension plan.

The plan promises workers a 7 percent return on their contributions, as well as an employer “match” when they retire, usually at age 60. The board, made up of people appointed by the governor, has invested aggressively to meet that goal.

If a county comes up short, the state gives it the right to reduce its workers’ benefits, said Amy Bishop, a spokeswoman. “That’s really the key,” she said. “They can lower those benefits.”

via: dallasnews