Debt Ceiling Reached But Sky Isn’t Falling on Thrift Savings Plan Investors

With the United States hitting the debt ceiling, can you still withdraw your money from your Thrift Savings Plan? Here is the answer from a TSP official.

With the debt ceiling reached by the federal government yesterday, and numerous articles in the media noting that part of a temporary solution is suspending investments from the G fund and the Civil Service Retirement and Disability Fund in Treasury securities, it isn’t surprising that there is confusion and a fertile breeding ground for rumors about how this will impact Thrift Savings Plan Investors.

Can I Still Withdraw Money from My TSP Account? 

We received a few anxious queries from readers that are like this one:

“Please discuss/explain talk about a new retiree (is) unable to withdraw TSP funds because the funds have been put on hold to pay the deficit down. How could this be?” 

In anticipation of the federal government hitting the debt ceiling, we recently published this statement: “In these circumstances, the Secretary of the Treasury is authorized to

  • suspend the investment of amounts in the Civil Service Retirement and Disability Fund that normally would be invested in interest-bearing Treasury securities;
  • sell or redeem Treasury securities held by the CSRDF prior to maturity; and
  • suspend the issuance of interest-bearing Treasury securities to the “G” fund of the Thrift Savings Plan.

So, in effect, the G fund in the Thrift Savings Plan is impacted and the Civil Service Retirement and Disability Fund is impacted as Treasury securities are not issued for these funds when there is an on-going debate and Congress has not raised the debt ceiling again.” (See What Happens to Your TSP Funds If the Debt Limit is Not Raised?)

And, to clarify a common misconception, the money isn’t being used to pay down the nation’s deficit. The money is being used to pay the current bills for the government which normally borrows about 40% of each dollar that is spent. Since the government cannot borrow more money (and adding more to the deficit), it is using these funds to pay on going expenses. 

But, despite the apparent belief by some readers that investors in the Thrift Savings Plan are unable to withdraw funds, that is not the case.

Assurance to TSP Investors 

According to the director of external affairs for the Thrift Savings Plan, Tom Trabucco, “There are no new restrictions on loans or withdrawals from the TSP, and there will not be any imposed as a result of the (federal government) reaching the statutory debt limit.”

Mr. Trabucco also noted that “The Board requested legislation on April 30. 1987, which guarantees that the Federal government will pay earnings on G Fund investments even when the Treasury Secretary cannot issue securities to the G Fund because doing so would exceed the statutory debt limit. That legislation was signed into law on May 22, 1987, by President Reagan and has functioned on many occasions since then to allow the TSP to operate normally during “debt issuance suspension periods”. P.L. 100-43, 5 USC section 8438 (g).”

In the past when this has occurred, there has not been any impact on the money that has been invested in the Thrift Savings Plan.

Is This a Default of Payments by the Federal Government? 

Several readers have also asked what happens to their Thrift Savings Plan funds if there is a default on payments by the federal government.

Note that the current situation is not a default by the federal government. Here is how an article in the Wall Street Journal defined a default in payments:

A default would occur after the emergency measures are exhausted and it runs out of cash to pay its bills. Treasury officials say that would occur Aug. 2, if Congress does not raise the debt ceiling before then. They say that could mean stopping or limiting not only interest payments to debt holders, but also Social Security and Medicare payments, unemployment benefits, tax refunds and money owed to government contractors. 

That has not occurred and is unlikely to occur. 

For those who are intently focused on the question, apparently based on a strong conviction that the government’s economic policies are leading to a default in the near future, we do not know how the federal government would handle its payments.

It is possible that the Treasury would give some payments priority over others although Treasury officials say that prioritizing payments is not a practical option. “The government’s cash flows are lumpy—inflows of tax money and outflows of obligated payments often don’t match up neatly. That means many types of payments could be affected. And there would be lots of legal issues surrounding delays of government payments to creditors.”

So, obviously, there are concerns from some readers and in the national media about a possible default at some point in our future. 

But some experts do not see the debt limit as the big problem. Rather, the problem is the inability of our elected leaders to be able to contain their urge to spend ever larger amounts of money.

“I think technical default would be horrible,” says Stanley Druckenmiller, the legendary investor and onetime fund manager for George Soros, “but I don’t think it’s going to be the end of the world. It’s not going to be catastrophic. What’s going to be catastrophic is if we don’t solve the real problem,” of Washington’s addiction to spending money the government doesn’t have.

You can anticipate hyperbole and heated rhetoric in coming weeks about the debt ceiling. Remember that we are approaching another national election in 2012 which always leads to heated rhetoric and hyperbole about one issue or another. The political debate is likely to continue for some time and the deficit spending problem of the federal government is certainly a very real problem.

While the ultimate outcome of the political and economic debate is not known, your investments in the Thrift Savings Plan and your ability to use the money in your accounts has not been impacted and unlikely to be impacted based on previous experience with debates regarding the nation’s debt ceiling.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47