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March 17, 1999 SSP No. 16

State and Local Government

Retirement Programs: Lessons in

Alternatives to Social Security

by Carrie Lips

Executive Summary

that will provide for their own future benefits.

Prefunding also provides security for future

A

pproximately five million state and local

retirees: while Social Security is facing a severe

employees are exempt from Social Security

shortfall in revenue, most state and local plans

and instead participate in retirement plans

are fiscally sound and, in many cases, thriving.

administered on the state and local levels. The

Defined-contribution plans, such as the city

history of those retirement plans provides valu-

of San Diego's, are evidence of the feasibility of

able information for policymakers attempting to

a system based on mandatory individual invest-

reform the federal program.

ment. Participants in those systems enjoy mar-

State and local retirement plans generally

ket rates of return on their contributions and

provide plan participants with more benefits and

have ownership of their retirement income,

greater flexibility over retirement age and plan

which means they do not face the risk that the

payout than does Social Security. Those state

government will decide to cut their benefits.

and local plans can provide superior benefits

State and local defined-benefit plans demon-

because they predominantly "prefund" future

strate the financial benefits of a funded system,

benefits, either by saving and investing the pro-

but show that there is a danger, when govern-

gram's income or by allowing the participants to

ment invests, that political pressure will influ-

save and invest their contributions in accounts

ence investment practices.

Carrie Lips is Social Security Analyst for the Cato Project on Social Security Privatization.

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