The "Debt Issuance Suspension Period" and $186 Billion of Your Retirement and TSP Funds

By on July 18, 2011 in Current Events, Retirement with 40 Comments

A recent article on Federal Pay, Federal Retirement and the Debt Ceiling generated a number of responses. Some of the comments were thoughtful. Others were expressing rage and hurling invectives.

To put the federal borrowing from the Civil Service Retirement and Disability Fund (CSRDF) and the G fund in perspective, keep this figure in mind: $186 billion. That is the approximate amount, based on the figures from the Treasury Department cited below, that has been used from these funds to keep the government afloat since the debt ceiling was reached back in May. Essentially, this is a form of bookkeeping fiction used during an emergency to allow the government to continue to spend money without appearing to increase the public debt.

The purpose of our recent article was to focus an issue we have not seen highlighted. Understandably, some were upset with any suggestion of a possible disruption in their monthly income. As we have pointed out, the civil service retirement fund and the TSP’s G fund are being used to help the government pay expenses for which it lacks the money to pay.

One irate reader quoted a note he received from the Office of Personnel Management. According to this reader: “The answer was simple, CSRS retirees will get their annuity payments even if you and the RWNs cause a default.”

Borrowing from the federal retirement funds is not a new event. (For more background information, FedSmith advised readers as early as January and again in April about what was going to happen.) The money (or the Treasury securities) has always been returned by the government and everyone was “made whole.” The reader did not like any inference there was any threat to future federal retirement payments because of the federal deficit after receiving this from OPM: “Because the Civil Service Retirement and Disability Fund should ultimately be made whole (including lost interest) there is no reason for concern by employees or retirees for the ability of the Fund to pay benefits into the future.” 

No doubt, every current federal employee and retiree can now sleep better at night with this reassurance. The OPM statement will most likely prove to be completely accurate. And, if that is as much as you need or care to know, you should stop reading right here. 

What some readers also know is that the retirement trust fund and the G fund are full of government securities. Congress spent the money that came in to fund these entities and the government is promising to pay this debt back to the funds when necessary to pay retirement benefits.

Where the money will come from to pay the money that isn’t there is anyone’s guess. President Obama hopes it will be from higher taxes; it may come from selling more debt to China or other foreign and domestic investors; it may come from a growing economy which leads to more taxes being paid. The same or a similar system is used for the Social Security Trust Fund and, when those receiving Social Security are told the system is solvent, it means there are government securities in the fund. It also does not prevent the government from not paying money out to some recipients in the future if, for example, Congress decides to impose a “means test” or otherwise restricting payments to put less pressure on the federal budget.

Trust fund “balances” are a bookkeeping device. Here is one explanation of how they work:

“They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits.”

That quote is from Jack Lew, the director of OMB when he worked for President Clinton and who is now the OMB director under President Obama. (See page 337 of the document.)  Payments are dependent on the government appropriating more money to actually pay the benefits.

The Treasury wrote last week it is now suspending reinvestment of the Exchange Stabilization Fund, “the last of the measures available to keep the nation under the statutory debt limit.”  

 

Linking The Federal Debt With Your Current and Future Retirement 

One reader responding to the FedSmith article provided specific information that underlines the point of our original article. Our thanks to Robert Rosencrans for sending along the information.

The information was reported in The Casey Report—a subscription service for investors. The financial information below is from U.S. Treasury reports and the charts we have created display the changes in the accounts that impact our readers.

Doug Hornig, in writing for The Casey Report, had this observation. 

“The CSRDF is the Civil Service Retirement and Disability Fund. The G Fund is part of the Thrift Savings Plan. Though there are some differences in employer vs. employee contributions, both are basically pension plans for civil service employees. And both have basically been looted.” (emphasis supplied)

The observation that the funds have been looted is extreme but, whether you agree or not, you should know what is happening to the money you are counting on for your retirement.

Here is a chart showing what has occurred in the equities comprising the Civil Service Retirement Fund. The funds are volatile from month to month but the trend is clear. In May, the assets declined by $21.8 billion. In June, the assets declined another $61.2 billion. These figures are rounded off and are from the U.S. Treasury monthly reports.

 

What Does This Mean?

At the end of last year, the fund had over $775 billion in assets. The Office of Personnel Management estimated at that time that the total would continue to grow and would reach $806 billion by the end of 2011.

Your TSP Assets and the Federal Debt 

The actual impact on these assets is more clearly displayed in the TSP G fund figures. Here is a chart showing assets held by the Thrift Savings Plan’s G fund from January 2011 through June 2011. The G fund typically goes up each month. As you can see from this chart, that was the pattern again this year until May.

What has happened to the securities held by the TSP? 

Around $130 billion in assets at the end of April went down to about $27 billion by June 30. Obviously, it can’t go much lower. This does not mean that your investment is about to disappear. It means the government has the power to use it for its own purposes.

The Thrift Savings plan has previously told federal employees:

“The make-whole provision means that TSP participants who have invested in the G Fund will not lose anything. The G Fund account balances would be exactly the same from day to day as if they were invested in Treasury securities. Furthermore, disbursements of TSP loans and withdrawals would not be delayed, nor would the amounts of those payments be reduced.” 

Moreover, Thomas Trabucco, the director of External Affairs for the TSP wrote to us in an email last week that despite the current uncertainty about the debt limit,  “there is no investment that I am aware of that is safer than the G Fund.”

Mr. Trabucco also states that the procedure of not issuing new G fund securities “is clearly clumsy to administer and suboptimal. However it fully protects G Fund investors and effectively insulates TSP investments from the politics of the debt limit” and that the full amount for the G fund at the end of may was about $130 billion even though the G fund securities have not been issued for that amount.

With the uncertainty in the markets, fear of inflation, failing banks, fear of default on debts by various countries, and the rise in the price of gold, Mr. Trabucco is correct and your money in the G fund is probably as safe or safer with the government promise to pay back the money than it would be elsewhere. There is considerable confidence among investors that even though the government has stopped issuing securities for most of the G fund, and even though there is no agreement on raising the debt ceiling and the federal government has accumulated a crushing federal deficit, government securities will be created to replace those that were taken out.

The G Fund is, in effect, money held by the government and invested in Treasury securities unique to the G fund. Essentially, this is money that belongs to the investors. Based on comments from our readers, many in the federal community are of the opinion that, despite the historical precedents cited by the Treasury secretary, it should be off limits for use by the federal government.

Based on the current situation and the willingness of the government to use retirement funds for its own purposes, consider this: Hungary has told its citizens to give their retirement savings to the government or, alternatively, lose the right to the state pension while still being forced to contribute money to it from their paychecks. The plan gave the government control over $14 billion of individuals’ retirement money. Bulgaria instituted a similar program. 

Some readers will scoff. The United States is not Bulgaria or Hungary. But, consider this: Last year, the French government decided to earmark 33 billion Euros from its national reserve pension fund to reduce their nation’s deficit. In Ireland, a fund was created to support Irish pensions from 2025-2050 and to provide pensions for some public sector employees. In 2009, the Irish government earmarked four billion Euros from the fund for bank rescue. The remainder was taken over by the government in 2010. (See European nations begin seizing private pensions)

Very few people think that could happen here. Most Americans probably trust that the federal government would not take over our retirement funds (or the IRA’s or 401(k) funds in the private sector) to help finance the government’s deficit. The citizens of the European countries where it happened probably did not envision the government taking over their retirement funds either.

The current financial mess points out to those in the federal community that there is a financial problem in the United States just as there is in Europe. We are borrowing more than 40 cents of every dollar spent by the federal government. The current financial emergency will probably be resolved in some way. But, unless the resolution solves the problem of the government spending more than one trillion a year than it receives in revenue, the next financial emergency may require a more drastic cure than just raising the debt ceiling again.

 

 Your Take: How Should Your Retirement Funds Be Used by the Government?

© 2016 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

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.

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