WASHINGTON - Fearful of ever-rising Social Security taxes, three Texas counties dropped out of the federal retirement program in the early 1980s, channeling their employees' payroll taxes into private investments instead.
The bold 20-year experiment has yielded contradictory and somewhat surprising results: Many of the counties' 3,000 employees - especially low- to middle-income workers - will actually earn less money than if they had stuck with Social Security, according to a congressional analysis. Yet the workers seem to be genuinely satisfied with a system that gives them far more control over their own retirement pension than Social Security ever could.
"This is all about ownership," said Don K. Kebodeaux, a retired bank executive and one of the architects of what has become known as the Galveston Plan. "Try telling any of these people that they need to change back to Social Security, and they'll laugh in your face."
Across the globe, countries as diverse as Chile, Singapore and Britain have steered their state-funded pension systems toward individually owned investment accounts. But as the presidential campaigns of Texas Gov. George W. Bush and Vice President Al Gore joust over the future of Social Security, they need look only as far as the Gulf coast of Texas for a real-life privatization lesson for the nation.
To be sure, the Galveston Plan differs significantly from the reformed Social Security system that Bush envisions. Under the Bush blueprint unveiled Monday, workers could divert an unspecified percentage of their salaries from Social Security payroll taxes to privately owned retirement accounts that could be invested in the stock market.
The rest of the 12.4 percent payroll tax would continue to go to Social Security. Thus, the government would still provide a retirement benefit, though the guaranteed portion would likely be smaller than it is now.
The three Texas counties - Galveston, Matagorda, and Brazoria - took advantage of a loophole in the original Social Security law and opted out of the system altogether. The 12.4 percent payroll tax was replaced by a 13.9 percent payroll contribution. Most of the money was invested in conservative private investment plans with fixed rates of return.
At first blush, the results have been encouraging.
Jane Breslin, a veteran of Galveston County's probate court, retired in 1993 and has been receiving $1,900 a month from the county plan. By contrast, Social Security is paying $960 a month for the 21 years she worked in the private sector.
At 61, Galveston County Deputy Sheriff Ray Davis is only now thinking about retirement and expects the county plan to provide as much as $2,600 a month. Social Security, he said, would have provided, at most, $1,400 a month.
"I don't know if it'd work for the rest of the country, but anyone here whose been here any length of time is very well-pleased," Davis said. "I certainly wouldn't opt to go back to Social Security."
Yet that sense of satisfaction may be misplaced, according to an analysis by congressional investigators. In a study last year, the General Accounting Office found that the Galveston Plan does indeed handsomely reward high-income workers, especially those without spouse or children.
But low-income workers - and middle-income workers with fami- lies - generally don't fare as well as they would in the Social Security program. And those results could provide a lesson for all privatization proposals.
For many workers, the benefits of a privatized plan can be deceptive. In the current Social Security system, lower-income workers receive a greater portion of their incomes back as Social Security benefits than do higher-income workers.
In a privatized system, all workers would divert the same portion of their income into private accounts. Lower-paid workers would thus reap lower returns over time.
Moreover, Social Security benefits rise each year, through a cost-of-living adjustment, to keep pace with inflation. In the Galveston Plan, a worker can opt for a lump-sum benefit at retirement or an extended payout. But neither option provides a cost-of-living allowance. And in both cases, there is a risk that a retiree could outlive his or her benefits.
Social Security's biggest advantage is a spousal benefit that pays up to 50 percent of a worker's benefit to a surviving spouse. No privatized system includes anything comparable.
The GAO calculated, a low-wage Galveston County employee with a spouse and a 35-year work history would earn $1,125 a month under Social Security but as little as $542 under the county's plan. Even a high-wage married worker would fare slightly worse under the privatized plan. And that imbalance would grow over time as the Social Security benefit rose with inflation.
Even superior investment returns might not make up for cost-of-living increases and other benefits that only Social Security provides.