When Amanda Tainio went to work as an associate city planner for Liberty Lake four years ago, retirement wasn’t foremost on her mind.
Like many of her generation, the 28-year-old is skeptical that Social Security will be around when she retires.
Unlike most of her peers, she works for a city that doesn’t pay Social Security taxes, and, instead, contributes to a substitute retirement plan.
“I think in the long run, I’ll be doing better on this than I would on Social Security,” Tainio said.
As the federal government debates privatizing portions of Social Security – which faces the dichotomy of more beneficiaries who are living longer and yet fewer younger employees to support the system – Liberty Lake and Spokane Valley have already embarked on a privatization path.
The cities are among about two dozen Washington municipalities, including Bellevue and Federal Way, that don’t participate in the national pension system, said Timothy Beard, Social Security employer services liaison for Seattle’s regional office.
A total of 826 public sector employee groups in Washington – including some school, police and fire districts – offer substitute retirement systems, Beard said.
The Spokane Police Department is among those with alternate pension plans.
Groups enrolled in Social Security can’t leave the system. However, newly incorporating cities can reject it in favor of their own plans.
A 70-year-old federal law allows public entities to offer substitute plans, Beard said, providing they meet Internal Revenue Service criteria established by minimum contributions or benefit amounts and pay into Medicare.
Advocates of privatizing Social Security say alternative plans offer local control, higher returns and potential for early retirement.
Social Security proponents say private investments don’t match disability or surviving spouse benefits, are a disadvantage to low-income workers and deplete as people age because there are no built-in cost-of-living increases.
Richard Munson, Spokane Valley’s deputy mayor, recalls the City Council debating privatizing at length before passing the ordinance that put a substitute plan into place.
“This was not a decision that was taken lightly,” said Munson, who voted against the ordinance.
Ultimately, he said, the council supported it because staff said the accounts offered the portability and increased returns that employees wanted at no additional cost to the city.
Ken Thompson, Spokane Valley’s director of finance and administrative services, qualified for his full Social Security benefit before he was hired by Spokane Valley.
For 57-year-old Thompson, his 401(a) replacement account will supplement his national pension.
Spokane Valley and its 46 employees each pay 6.2 percent of gross wages (which equals the 12.4 percent Social Security contribution) into a 401(a) plan, managed by ICMA-RC.
Additionally, the city and employees both contribute to a public employees’ retirement system.
The city’s 401(a) consists of a personalized mix of Vantagepoint mutual funds, which range from conservative to aggressive.
Thompson said it’s impossible to predict how private accounts will compare with Social Security because the earnings vary.
“You can’t draw any conclusions, because we won’t know until each individual employee gets their retirement.”
Few cities can make long-term comparisons between Social Security and privatized benefits.
However, the 24-year-old system in Galveston, Texas, is being studied as a possible model for privatization.
Galveston County opted out of Social Security (before that exception law was changed) but maintained the same contribution amounts, investing that money into secure bonds.
Several years ago, the National Center for Policy Analysis, a nonprofit, nonpartisan public research organization, questioned if Galveston’s low-income workers would get lower benefits than with Social Security.
Initial projections placed annual investment growth at 4 percent.
However, with returns averaging 8.64 percent annually, Matt Moore, a senior policy analyst for NCPA, said Galveston’s retirees may fare better across the board than they would have on Social Security.
Social Security offers a range of benefits, with retirees averaging $922 a month.
Whether private accounts provide similar or higher benefits depends on how much money is invested and the length of time in the market and types of holdings, he explained.
“As long as the employees are diversifying their assets and investing responsibly, then that should be enough to adequately fund their retirement,” Moore said.
Moore said Liberty Lake and Spokane Valley employees’ retirement benefits should meet or exceed Social Security.
However, he cautioned about investor mistakes, such as choosing overly aggressive or conservative funds.
“There’s a real danger with plans that give employees the opportunity to choose among funds,” Moore said.
Additionally, he warned against allowing employees to borrow from their retirement for home purchases or emergencies.
In Galveston, borrowers irreversibly depleted retirement accounts, and the county recently revoked the loan option.
“There are so many ins and outs and caveats and details in these things,” he said.
Younger employees have the most to gain from privatization if they invest in indexed mutual funds, which often grow exponentially over decades.
“Depending on the plan, they are probably going to be better off than the rest of us who are in this system,” Moore said.
In Liberty Lake, the private accounts are showing promising earnings.
Arlene Fisher, the 43-year-old director of finance and administration for Liberty Lake, last year earned 9.8 percent on her aggressive funds and 6.4 percent on her conservative funds.
Liberty Lake and its 23 employees contribute twice as much as is required by Social Security. Money goes into two 401(a) accounts, managed by ICMA-RC. The accounts lower taxable income but are taxed when collected.
Investment representatives consult with workers several times a year, projecting earnings with potential retirement dates and helping them adjust their portfolios. Employees vote on changes to the system.
“I think the bottom line for us is, we are very retirement proactive and we chose a great system,” Fisher said.
At 64, Liberty Lake City Administrator Lewis Griffin has heard two decades of solvency debates. He paid into Social Security for 35 years and qualifies for full benefits. His ICMA accounts are supplemental.
While he’s enrolled in a private system, he believes retirement funding shouldn’t be left to the discretion of private companies.
“Unless you make something mandatory, there’s going to be a lot of people who are suffering out there in the future,” Griffin said.
Beard said Social Security is part of a “three-legged stool,” working in conjunction with savings and private investments to build a safety net.
Cities offering substitute plans may someday be required to join Social Security, he said, adding, “I’d be surprised if it came out otherwise.”
Two years ago, the U.S. General Accounting Office testified to a congressional subcommittee on Social Security that mandating universal coverage could reduce the system’s projected 75-year deficit by 10 percent.
Tainio doesn’t miss Social Security since she never viewed it as a given. Micromanaging her retirement portfolio doesn’t make sense to her, because she has plenty of work years ahead.
She plans to retire at 55, something the investment adviser said she could accomplish if she keeps paying into the ICMA accounts at the current rate.
“So far I think it has done really well,” Tainio said. “I like it because it gives you more control over how your funds are doing.”
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