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Free Market Project

Friday, November 25, 2005

Updated 11/16/05
 


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Apples and Oranges:
Media Wrongly Equate Galveston Pension Plan with Bush’s Social Security Reform

By Amy Menefee
March 25, 2005

     A flurry of media coverage beginning on March 18 put Galveston, Texas, back into the Social Security spotlight. It’s one of three Texas counties that have gained attention because they opted out of Social Security in the early 1980s, when it was still legal to do so.

     The New York Times, The Washington Post and ABC News warned Americans last week that the counties’ pension alternative to Social Security was a telling “laboratory” for testing President George W. Bush’s reform plan. According to these news sources, the Galveston plan produced “controversial” results that cast doubt on the wisdom of revamping what the Post called the “venerable program” of Social Security.

     The Galveston plan allows people to keep the money they pay into the program – while providing returns on their investment at a much higher rate than Social Security. The media have painted the plan as “controversial” because lower-income workers are not getting paid out of the contributions of higher-income workers, as they do with Social Security. This is because it is an individual retirement savings plan, much like a 401(k). For all workers, the Galveston plan has paid, at minimum, an average return of 5 percent. That’s more than twice as much as the usual 2 percent return for most workers paying into Social Security.

     Rather than fairly presenting the fundamental differences between Social Security and the Galveston plan, these stories used those differences in a wrongheaded comparison to attack the idea of private accounts. They dismissed the program’s success and implied that Bush’s plan is to apply Galveston to the nation. That’s simply not true.


Galveston Not Bush’s Plan

     Bush didn’t set up the Texas plan. He wasn’t even governor when the three counties voted to leave Social Security in 1981. And his current proposal isn’t like the one used in Galveston. That hasn’t stopped journalists from writing headlines like The Washington Post’s on March 19: “In Texas, A Model For Bush Proposal.” Likewise, The New York Times on March 18: “On Texas Coast, a Laboratory for Private Accounts.”

     On ABC’s “World News Tonight” March 20, Terry Moran and Geoff Morrell again linked the Texas approach to Bush’s proposal and immediately cited a poll claiming Americans found the idea of private accounts “risky.” Their story included a graphic titled “Social Security Better in the Long Run.” However, comparing the two systems is not as easy as the media make believe.


The Apple is Redder than the Orange

     Journalists repeatedly refer to a 1999 report from the General Accounting Office (since renamed the Government Accountability Office) in their case against private accounts, harping that lower-income workers would get a worse deal outside Social Security. Reporters are, however, ignoring the “fundamental differences in the purpose and structure of the two approaches,” to quote the GAO’s report. The plans were set up to do different things, and this means comparing them is destined for disaster.

     The GAO said that, in looking at Social Security versus alternative pension plans, “It is important to note that the Alternate Plans’ performance is not necessarily indicative of how well a proposed system of individual accounts within Social Security might perform.” Those words were written in 1999, before Bush was president. It was a time when President Bill Clinton was also talking about the problems of Social Security. The GAO researchers issued these disclaimers to prevent the very type of inaccurate comparisons the media are using today.

     Social Security is often portrayed as a “venerable” source of guaranteed benefits, when the reality is that any future Congress could cut those benefits just like it did in 1983, when the program demanded another quick fix. Though workers are paying in and eventually getting payouts, it doesn’t work like an insurance program. It works like a welfare program. Galveston, on the other hand, is a system of individual savings accounts. Workers and their employers pay in about the same percentage of wages as they would with Social Security, but they go to accounts with workers’ names on them. Those who make lower salaries are, by extension, putting away smaller amounts of money along the way – but they are getting the same positive return as higher earners.

     The New York Times was the only media outlet that openly stated the pro-welfare complaint against the Galveston plan. Reporter Simon Romero cited Syracuse University professor of social work Eric Kingson, a much-quoted source on the side of Social Security. Kingson “says [the Galveston plan] is a threat to the ‘quiet redistribution’ of wealth under Social Security that provides poorer retirees with a higher share of their pre-retirement wages than it does to their richer counterparts.”

     The Times, Post and ABC also cited a 1999 Social Security Administration study to support their case. The SSA did its own comparison of Social Security to the Galveston plan. This excerpt, from the executive summary of this report, sums up the reasons why it is a complicated and lopsided comparison to make:

     “Whether the Galveston Plan provides a retirement, disability, or survivor’s benefit that is higher or lower than Social Security’s depends upon factors including the worker’s earnings, time in the labor force, the age and number of beneficiaries, and the type of benefits being evaluated.”

One Size Doesn’t Fit All

     Lopsided comparisons in two of these stories are propped up with retirees from Galveston who say they were fleeced by the plan there. Both times, a woman says she didn’t get the higher return that was promised. Each case, however, has a different set of factors: how long did that person work for the county? Did she take any lump-sum payments from her personal account along the way, reducing eventual retirement benefits? Galveston just did away with a provision called the “hardship withdrawal” in January 2005 to prevent workers from essentially looting their own retirement funds. Journalists aren’t addressing all of these questions for each case they cite and they are using extreme examples to discredit the program.

     Galveston and other alternative pension plans do offer lessons on what works and what doesn’t. However, the view of Social Security and its alternatives comes down to the question of wealth redistribution. Instead of dismissing Galveston for not being a program it wasn’t designed to be, journalists should report the facts without stretching comparisons to serve their ends.

 


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