Summary: Under an option available to state and local governments until 1983, three Texas counties withdrew from Social Security in 1981 and replaced it with a system of individual accounts that provided retirement and disability benefits to their employees. Social Security faces a long-term funding shortfall, and some have suggested that the experience of these three counties underscores the advantages of individual accounts as an element of Social Security financing reform. GAO found that although Social Security and the alternate plans of the three Texas counties offer retirement, disability, and survivor benefits, there are fundamental differences in the purpose and the structure of the two approaches. Social Security is a social insurance program designed to provide a basic level of retirement income to help retired workers, the disabled, and their dependents and survivors avoid poverty. Social Security benefits are tilted to provide relatively higher benefits to low-wage earners and the benefits are fully indexed to protect against inflation. Social Security, a pay-as-you go system, is projected to produce a negative cash flow in 2013 and become insolvent by 2032. In contrast, the alternate plans are advance-funded; that is, the contributions made by workers and their employers, which total 13.915 percent of workers' pay, and the earnings from those invested contributions are used to fund retirement benefits. At retirement, a worker can withdraw the money in the account as a lump sum or choose from several monthly payment options, including a lifetime annuity. GAO's simulations of how workers for the three Texas counties and their dependents might fare under the two systems revealed that outcomes generally depend on individual circumstances and conditions. For example, the alternate plans provide larger benefits for high-wage workers than Social Security would, but in some cases, such as when spousal benefits are involved, Social Security benefits could also eventually exceed those of the alternate plans. GAO notes that the alternate plans' performance is not necessarily indicative of how well individual accounts might perform within Social Security. For example, the alternate plans have followed a very conservative investment strategy that precludes investing in common stocks.
