To make good on a promise to my wife, a native Texan, we just completed our move from Florida back to Texas.
When we left the Lone Star State in 2005 (on her birthday, no less), she told me she’d like to move back when the kids had left the house. With the youngest now a freshman in college, it was time.
We could live anywhere, since my work doesn’t require a geographic center. So last fall we narrowed the search for a new home by considering climate, natural beauty, proximity to a major airport and health care, and travel time to relatives.
I didn’t quite have spreadsheets and critical path models laid out, but pretty close.
In the end, we settled on the Houston area.
As things go sometimes, we didn’t exactly give equal weight to each of our original criteria.
Houston’s climate is sticky, and oil production facilities often obscure the natural beauty. However, we’re close to major airports and, most importantly, family is less than an hour away.
Once we picked out the area, we had to find a neighborhood and a house.
We ruled out many very quickly, and focused on just a few that seemed to fit our lifestyle. We eventually found an active community with a lot of outdoor activities that’s near water. As I’ve mentioned in the past, I like to sail.
And the neighborhood has another redeeming quality – it’s just over the line that separates Harris County, the home of Houston, from Galveston County.
Living on the Galveston side of the line doesn’t change the humidity or the proliferation of oil storage tanks, but it does allow me to avoid some things like the pension crisis that’s currently burning in Houston.
The city’s pensions, covering firefighters, municipal employees, and police, are underfunded by roughly $3.2 billion, with more than half of that, or $1.7 billion, owed to municipal employees alone.
As time goes on, the city falls deeper in the red. Eventually, they’ll have to deal with it, which will mean wringing concessions from all parties, including Houston and potentially Harris County taxpayers.
That’s a game I didn’t want to play.
How these pensions ran off the rails is a story for another day, but like so many others around the country, today they’re in a ditch. And I don’t want to be on the hook for pulling them out.
Instead, we live just over the border in a county that, while not totally free of pension problems, chose a different path almost 30 years ago.
There’s still a police pension in Galveston County and, as you might expect, it’s only 45% funded. But the bulk of employees are under a different plan.
The voters in Galveston, as well as Brazoria and Matagorda counties, opted out of Social Security for municipal employees and set up individually-funded pensions.
The program has worked so well that it’s considered a model for the nation.
The Alternate Plan, as it’s called, requires employees to contribute 6.1% of their pay, while the counties contribute 7.8%.
The funds go to individual accounts, where most of the assets are conservatively invested by First Financial Benefits, which guarantees a return of 3.75% to 4.00%.
Like Social Security, the Alternate Plan provides life insurance, has a feature that pays income for life, as well as some other bells and whistles, but there are major differences.
Social Security provides more salary replacement in retirement to workers who earn less, making it a progressive system.
The Alternate Plan buys an income stream for each worker depending on his individual contributions (along with those of the county on his behalf). And the payout under the Alternative Plan isn’t capped.
If your contributions would buy an income stream of $10,000 per month for life, as would happen for someone who earned $125,000 for 25 years, then that’s what you get. Under Social Security, the maximum monthly payments this year are $2,369. Period.
At its core, the Alternative Plan funds an insurance policy that each employee can customize to his individual needs.
This allows the employee to take a lump sum at retirement, or receive higher payments over a short period of time (10 years is common). Neither of these options are available with Social Security.
If these attributes sound familiar, it’s because I’ve discussed this sort of personal pension several times.
Any move we can make toward decentralizing retirement systems and putting them in the hands of individuals is a step forward. As we’ve seen nationally and locally, when third-parties manage pension funds, things often go awry, and provide weird incentives.
When politicians offered pension sweeteners instead of wage increases to public employees two decades ago, they probably didn’t think they were signing the financial death warrant of their own cities and counties, but that’s exactly what happened.
And they did it because it was easier to push the responsibility into the future, and onto future politicians and workers, than to deal with the pain at the moment.
To end the cycle, we’ve got to take a bold step, just as Galveston, Brazoria, and Matagorda counties did decades ago, and put responsibility back where it belongs. Back in the hands of individuals. (This is what Charles’
While most of us will never work for one of these three counties (though I now live in one of them), or any public entity for that matter, we can still take the same steps: building our own private pensions.
In the insurance world, these are called deferred income annuities, and can be purchased or added to annually as we go through our working lives.
By taking this approach, I can rest assured that I control my private pension. And I can relax in my new neighborhood and enjoy a great financial decision that the voters here made 30 years ago.
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