Social Security Reform:
Experience of the Alternate Plans in Texas
HEHS-99-31, Feb 26, 1999
Pursuant to a congressional request, GAO provided information on three Texas counties' employee retirement plans, known as Alternate Plans, focusing on: (1) comparing the principal features and benefits of these plans with those of social security; and (2) simulating the retirement, survivor, and disability benefits that individuals in varying circumstances might receive under the Alternate Plans and under social security.
GAO noted that: (1) while social security and the Alternate Plans offer retirement, disability, and survivor benefits to qualified workers, there are fundamental differences in the purpose and structure of the two approaches; (2) Social Security is a social insurance program designed to provide a basic level of retirement income to help retired workers, disabled workers, and their dependents and survivors stay out of poverty; (3) Social Security benefits are tilted to provide relatively higher benefits to low-wage earners, and the benefits are fully indexed to protect against inflation; (4) social security is a pay-as-you-go system that is projected to produce a negative cash flow in 2013 and become insolvent by 2032; (5) the Alternate Plans are advance funded plans; the contributions made by workers and their employers, which total 13.915 percent of workers' pay, and the earnings made on those invested contributions are used to fund retirement benefits; (6) the Alternate Plans' benefits are directly linked to contributions, so that retirement income is based on accumulated contributions and the earnings thereon; (7) at retirement, the worker can take the money in the account as a lump sum or select from a number of monthly payout options, including the purchase of a lifetime annuity; (8) GAO found that certain features of social security, such as the progressive benefit formula and the allowance for spousal benefits, are important factors in providing larger benefits than the Alternate Plans for low-wage earners, single-earner couples, and individuals with dependents; (9) many median-wage earners, while initially receiving higher benefits under the Alternate Plans, would also have received larger benefits under social security after 4 and 12 years after retirement, because social security benefits are indexed for inflation; (10) the Alternate Plans provide larger benefits for higher-wage workers than social security would, but in some cases, such as when spousal benefits are involved, social security benefits could also exceed those of the Alternate Plans; (11) survivor benefits often would be greater under social security than under the Alternate Plans, especially when a worker died at a relatively young age and had dependant children; (12) with regard to disability benefits, all workers in GAO's simulations would receive higher initial benefits under the Alternate Plans; and (13) it is important to note that the Alternate Plans performance is not necessarily indicative of how well a proposed system of individual accounts with social security might perform.