| SSP No. 16 |
March 17, 1999
|
State and Local Government Retirement Programs:
Lessons in Alternatives to Social Security
by Carrie Lips
Carrie Lips is Social Security Analyst for the Cato Project on Social Security Privatization.
Executive Summary
Approximately five million state and local employees are exempt from Social
Security and instead participate in retirement plans administered on the state
and local levels. The history of those retirement plans provides valuable information
for policymakers attempting to reform the federal program.
State and local retirement plans generally provide plan participants with
more benefits and greater flexibility over retirement age and plan payout than
does Social Security. Those state and local plans can provide superior benefits
because they predominantly "prefund" future benefits, either by saving and investing
the program's income or by allowing the participants to save and invest their
contributions in accounts that will provide for their own future benefits. Prefunding
also provides security for future retirees: while Social Security is facing
a severe shortfall in revenue, most state and local plans are fiscally sound
and, in many cases, thriving.
Defined-contribution plans, such as the city of San Diego's, are evidence
of the feasibility of a system based on mandatory individual investment. Participants
in those systems enjoy market rates of return on their contributions and have
ownership of their retirement income, which means they do not face the risk
that the government will decide to cut their benefits. State and local defined-benefit
plans demonstrate the financial benefits of a funded system, but show that there
is a danger, when government invests, that political pressure will influence
investment practices.
Index of Social Security Choice Papers
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