In 1981, three counties in Texas--Galveston, Matagorda, and Brazoria--decided to opt out of Social Security and instead provide their public employees with a system of privatized accounts.

While the privatization proposal advocated by President Bush is not an exact replication of the Texas plan, the concept is similar enough to warrant an examination of the Texas plan to see the impact of plans to privatize Social Security.

Methodology

With technical assistance provided by the non-partisan Congressional Research Service (CRS), a model was developed to compare the benefits of retirees under Social Security and under the Texas Alternate Plans.

The retirement case studies are all based on a married couple where one spouse did not work and the other spouse began working in 1960 and retired at the end of 2004. In order to most closely replicate Social Security’s monthly primary and spousal benefits for the life of both spouses, the case studies assume that a person retiring under the Texas plan converts the private account to a joint and survivor annuity.

In addition, because the Texas plan was not instituted until 1981, a person retiring in 2004 would have spent only about half of his or her working life under the Texas plan. Therefore, in order to provide an accurate comparison to Social Security, the case studies assume that the Texas plan was in place since 1960.

The survivor benefit case study assumes that the worker died at the end of 2004 at the age of 40 and is survived by a spouse and two minor children.

The Appendix provides a more detailed discussion of the methodological assumptions.

Results

Americans at every income level are clearly better off with Social Security’s guaranteed, inflation-protected benefit. The only exception is high income earners. And that is true only initially; over the course of retirement, even higher income earners are better off with Social Security.

Under the Texas plan, a married couple that has earned the median income would receive a monthly annuity benefit of $1568. Under Social Security, that married couple would receive $1818 at retirement--$3000 more over the course of the first year of retirement. Because Social Security beneficiaries receive an annual cost-of-living adjustment, at age 80, that gap increases to $13,440 more per year under Social Security than under the Texas plan.

Minor children are clearly better off with Social Security’s survivor benefits. If a worker who earned the median income dies at the age of 40, after working 20 years, the surviving spouse and two minor children would receive Social Security survivor benefits more than two and half times greater than they would receive under the Texas Alternate Plans.

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