No Risky Scheme: Retirement Savings Accounts that are Personal and Safe
by Merrill Matthews on 01/11/2002
18 Pages
One of President George W. Bush’s most important and controversial campaign proposals was to let workers place a portion of their Social Security payroll tax into Personal Retirement Accounts (PRAs). However, recent market volatility has raised questions about whether the stock market is safe enough for this portion of people’s retirement savings.
Can we create a Personal Retirement Account option that will ensure a better return on workers’ savings than Social Security while avoiding the risk associated with the stock market? The answer is to move from an “IRA model” to a “banking model” — what we might call a Retirement Savings Account (RSA).
Twenty years ago, officials in Galveston County, Texas, and two other counties opted out of Social Security. Today, workers in Galveston contribute 9.7 percentage points of their payroll tax to retirement savings. The money is loaned to a top-rated financial institution for a guaranteed interest rate. Those rates have varied but average in the 7.5 percent to 8 percent range.
Employees bear virtually no risk; they get their interest whether the stock market goes up or down — and they have done so for 20 years. Nor or employees making investment decisions. Professional money managers do that for them. This process works much more like a bank than an investment brokerage. And, for all intents and purposes, the money is as safe as if it were in a bank.
Upon retirement, workers can take their money in a lump sum or purchase an annuity that will pay them a guaranteed income for life. It’s their money, so it’s their choice. And the funds become part of their estate regardless of when they die.
In addition, the Galveston Model uses part of the payroll tax to purchase disability insurance and a life insurance policy that pays three times a worker’s salary, between a minimum of $50,000 and a maximum of $150,000. According to the U.S. General Accounting Office (GAO), workers in the Alternate Plan can expect to draw significantly more disability money than those who must rely on Social Security disability benefits.
Could such a plan be a model for the country? There is nothing new about Americans giving their savings to financial institutions that guarantee them a fixed return. That is, in essence, all the three Texas counties do. Banks and other financial institutions themselves could create a retirement package that included life and disability insurance along with a guaranteed interest rate.
Consider the competition that would ensue from the banking model. RSAs would be large, ill-liquid pools of money that would be extremely attractive to financial institutions, which would offer the highest possible interest rate and very low administrative costs to attract accounts.
Banks, insurers and other types of financial institutions operate under a government regulatory framework meant to protect consumers and their money. A system of RSAs would likely operate under a framework similar to the Federal Deposit Insurance Corporation (FDIC) program.
Unless proponents of a personal account option find a plan that addresses the “risky scheme” demagoguery that will be hurled at them, they will never get to a serious debate over those accounts. Only a model that is as safe as a bank is a viable political option.
If you did not arrive at this web page from within the IPI website, click on the link below to go to IPI: