Investing > Retirement Investments

Another alternative to Social Security
JOHN CUNNIFF, AP Business Analyst. Associated Press.
Copyright Associated Press

NEW YORK (AP) _ Though it's the most discussed plan for reforming Social Security, letting workers invest some of their payments in the stock market isn't the only way to save the system.

There's another way, and it's already been proved _ and not in theory or tests, but in the real world. And not in Chile, whose plan is often cited as a successful example, but right here in the United States.

This alternative plan, already in use for 20 years, is destined to gain a broader hearing now that the stock market has demonstrated anew its tendency to go to extremes, erasing billions of dollars of market value.

The so-called Galveston Model doesn't worry about stock market volatility because it doesn't invest in stocks. Instead, it lends the pool of money from participants to a top-rated financial institution.

In doing so, it obtains a better rate than you or I or any other small investor might receive. Over two decades the returns have ranged from 5 percent to 15.5 percent, averaging out to 7.5 percent to 8 percent a year.

Returns of that sort aren't what might be expected from prudent stock investments, but the risk is vastly reduced. And it's been time tested. And now the Institute for Policy Innovation, a Lewisville, Tex. think tank, and resident scholar Merrill Matthews Jr., think it deserves study.

Twenty years ago county officials in Galveston, Tex. opted to withdraw from the Social Security system (an option ended in 1983) and accept a retirement plan devised by Rick Gornto, a financial planner. Matagorda and Brazoria Counties followed suit.

Currently, according to Matthews, there are about 2,740 fulltime employees contributing a percentage of their payroll tax to retirement savings. First Financial Benefits of Houston then pools the money and loans it out to the best bidder at a guaranteed interest rate.

The employees bear little risk. "They get their interest whether the stock market goes up or down _ and they have done so for 20 years," says Matthews.

He cites these figures from First Financial Benefits:

 _A low-income worker ($17,124 a year) retiring at age 65 would get $782 per month from Social Security, but $1,285 from what is called the Alternate Plan.

 _The high-income worker ($51,263) at 65 will get $1,540 from Social Security, versus $3,846 from the Alternate Plan.

In addition, the Galveston model includes a life insurance policy that pays three times a worker's salary between a minimum of $50,000 and a maximum of $150,000. It pays double for accidental death.

While stock market returns have averaged more than 10 percent over the past six decades, that average includes huge gains in some years and big losses in others, a factor that opponents are bound to stress.

Matthews holds a doctorate in philsophy but his motives are pragmatic. The stock market model, proposed by President Bush, has worked in other countries, and could here, he says, but opponents have ammunition.

That ammunition has been provided by the stock market itself, whose plunge over the past year or so, coinciding with the Social Security debate, has erased as much as $5 trillion of stock valuations. Poor timing, he says.

Therefore, he suggests, it would be wise to consider the Galveston model to counter political posturing and "risky scheme demagoguery."

"A model that is as safe at your bank," he says, "may be the only viable political option."


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