Preparing for the Debt Ceiling Debate and the Impending "Fiscal Cliff"

By on December 17, 2012 in News, Retirement

Does the possibility of the “fiscal cliff” or hitting the debt ceiling limit (again) impact the investing habits of federal employees?

The last report we have from the Thrift Savings Plan is for the month of October. We do know that the prices of stock funds in the Thrift Savings Plan went up in November. Were federal employees putting their money into these stock funds in hopes of the nation’s financial issues being resolved with a positive impact on stock prices resulting from the political resolution?

While stock prices went up in November, the actions by TSP investors reflected a more conservative mood. In October, investors removed money from the C, ($126 million) S ($108 million) and I ($29 million) funds. Even more money was transferred out of the F fund ($126 million). The money went into the G fund ($172 million) and the L funds ($138 million).

The Debt Ceiling and Your G Fund Investment

These actions would suggest that TSP investors were more concerned about the safety of their investments in stocks and, instead of staying invested in stock funds, fled to the safety of the G fund or the more diversification offered by the lifecycle funds. It is also a good bet that the possibility of the federal government using the G fund to help fund government expenses if there is a delay in raising the debt ceiling was not a consideration for many of those that transferred their money into the G fund.

If you have forgotten or did not know about previous actions by the federal government when Congress has not approved an increase in the debt ceiling, here is a news flash. There is a good chance that your G fund investments will help fund the government while the political scenario is played out in Congress and in the media.

The existing debt ceiling is probably going to expire late in December or early in January. The reason is because the federal government is spending money much faster than it receives in revenue so it keeps borrowing more money. On December 12, 2012, the US Treasury Department reported that the federal Government had a budget deficit of $172 billion for the month of November, an increase of 74.8% over the monthly budget deficit for the prior year. With total outlays of $334 billion for the month, this means the government borrowed 51.6 cents for every dollar it spent.

The federal government is currently allowed to borrow up to $16.4 trillion dollars. We are rapidly approaching that number. To continue to borrow more money, that limit will have to be raised again. The American Constitution provides that borrowing money requires congressional action. In Article I, Section 8, Congress is granted the power “to borrow money on the credit of the United States.” The Obama administration has proposed to give the power to the president to borrow the amount of money he considers necessary. No doubt, any attempt to eliminate Congress from this process will trigger a new political debate and eventually end up in court if there is no political solution reached between the administration and Congress.

The last time the debt limit was reached was in August 2011. No one knows how this situation will play out in the political arena this time around. There is a good chance that federal employees will again be involved in the process through their investments in the TSP. We know from past experience that the Treasury Department can use some retirement funds of federal employees to avoid increasing the debt limit which is capped by law. That is likely to happen again if the debt limit is not raised by Congress.

When this is done, here is what happens to some of your retirement funds:

“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.

There is no long term impact on federal employees or investors in the Thrift Savings Plan. But, despite the history of everything coming out well in the end, the fact that the retirement investments are used as part of the political negotiating process makes many current and retired federal employees uncomfortable.

The Average TSP Balance

As of August 31, 2012, the average TSP balance was $68,452.93 according to the folks at the TSP.  For those employees under CSRS, the average TSP balance as of August 31st was $88,373.90. Most of these investors are older as the FERS system has been in existence since 1986. The average TSP balance for FERS employees as of August 31st was $87,720.21.

As of October 2012, 41% of investors’ TSP balances are invested in the G fund. 24% of investments are in the C fund, 8% of investors money is in the S fund, another 8% in the I fund, 5% in the F fund and 14% is invested in the lifecycle funds.

As of the end of October,  more than $136 billion has been invested in the G fund. Total assets in the TSP are now more than $324 billion.

There are certainly reasons to be concerned about investments but the reality is there isn’t much most Thrift Savings Plan investors can do about the fiscal cliff or the debt limit. In the long run, chances are that those that diversify their investments will do well. The debt limit debate will irritate or scare some investors if the G fund is used to fund government expenditures but there is unlikely to be an impact on their investments other than personal discomfort. We cannot predict what will happen with the fiscal cliff negotiations other than knowing that some taxes will go up, some taxes will go up a great deal, and there is likely to be less money for individuals to spend as the amount going into government coffers and the amount spent by the federal government continues to go up. Those that put most of their money into the G fund are likely to lose purchasing power but retain their initial investments and see a small return each year. Those that invest in stocks have the possibility of their assets increasing but with more risk to their initial investment as the market may be volatile–at least until a political settlement is reached.

In short, take care in making your investment decisions with close attention being paid to the length of time before you are likely to need the assets in your TSP. Those who are now retired or are about to retire will likely need that money sooner and will probably be more conservative. Those with a longer time frame may find that their assets will grow over time and that the current political and economic considerations are no more than a small blip on stock prices over time.

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

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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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  1. James says:

    The thing that really scares me is that even if we go over the dreaded fiscal cliff, I believe we are *still* in a deficit spending scenario.  If that is true, and please correct me if I am wrong, then what we are all afraid of is *still* not as bad as it needs to be to attain long term fiscal balance.

  2. chill out says:

    Sadly, the negativity around the other article to not permit employees to have the day off before Christmas without taking leave just shows why federal employees need the day off before Christmas as a holiday.  It has become so toxic at work and throughout the Govt. that everyone hates each other and is so negative, this is how mental illness starts and frustrates everyone else for the outcomes.  Everyone just chill…  it’s just a day, it’s just a holiday that Americans have blown out of proposition to what the real meaning is anyway.  We are thankful we have a job, we have paid our debt to the deficit, we have had our salaries frozen for 2 yrs. and have always been underpaid from the private sector.  I don’t care to hear how everyone thinks we are overpaid and that we don’t work.  Get in my shoes and see how much I work then you can spew your non-sense if you think I don’t do my job every day for public service.  It’s just a petition for God Sake…  this Administration doesn’t listen to the people anyway. Federal employees deserve the extra day off but they are willing to work as usual too.

  3. canada bound says:

    they will use any money there to build more buses to throw us under

  4. Scion de Publius says:

     
    Mr. Smith says, “In Article I, Section 8, Congress is granted the power “to borrow money on the credit of the United States.” The Obama administration has proposed to give the power to the president to borrow the amount of money he considers necessary. No doubt, any attempt to eliminate Congress from this process will trigger a new political debate and eventually end up in court if there is no political solution reached between the administration and Congress.”

    Mr. Smith cites only ½ of the applicable Constitutional reference.  I must remind Mr. Smith about the 14th Amendment, Section 4:  “The validity of the public debt of the United States, authorized by law … shall not be questioned.”  Once an expenditure is authorized by Congress under Article 1, Section 8, any DEBT incurred MUST BE PAID.
     
    When a congressional action is signed into law, and expenses to enforce that law are authorized within it (like the 2001 and 2003 tax cuts, the Afghan and Iraq wars, or the 2008-9 auto and bank bail-outs), it is automatically “public debt authorized by law”.  Any phony “ceiling” placed on that debt is completely and absolutely UNCONSTITUTIONAL by violating the 14th Amendment. 
     
    If Congress wants to be responsible and not incur (or limit) public debt, it must do so by NOT authorizing expenditures for unnecessary tax cuts, wars or bail-outs.  If Congress deems such expenditures to be necessary THEY MUST PAY THE DEBT, even if means raising more revenue (taxes) to do so!!!
     

  5. Dirty Harry says:

    I’ve read posts in forums where some retired folks havent even touched their TSP account. You dont have to be good in math to know, plan and practice what it will take to retire comfortably. That said  we can only control our end of it. The Fiscal Cliff talks are targeting feds despite the 2 plus year pay freeze. Stay tuned.

    • Gus and us says:

      forget about Gus and all the rest of us who are under this government BUS
      Canada has a better deal

    • grannybunny says:

      Per our current tax laws, people have to start some type of TSP withdrawal the year they turn 70.

  6. grannybunny says:

    I know one can’t always rely on what’s “been reported,” but it’s been almost universally reported that — in the fiscal cliff negotiations – John Boehner has offered to delay the debt ceiling debate for a year. 

    • $15300432 says:

      And barak hasn’t offered 1 dime in cuts in fact he wants to raise taxes and INCREASE spending

      • grannybunny says:

        Read the article just above this one in today’s FedSmith.  The current proposal matches tax and spending cuts.

  7. fed up fed says:

    NEW MATH?
    8/13/12  average balance in TSP for a CSRS participant is $88,373.09.  Average balance on that same date for a FERS participant was $87,720.21.   The average balance is listed as $68,452.93.   

    • Go Beavs says:

      You can’t average averages in real math.  Using batting in baseball provides a good example.  A batter in his first season goes 1 for 1 and his batting average is 1.ooo for that season.  His second season he goes 5 for 10 and his batting average is 0.500 for that season.  Averaging the averages gives the batter an unrealistic 0.750 batting average [(1.000 + 0.500)/2].  Doing the math correctly, the batter has hit 6 for 11 for a true batting average of 0.546.  

      Point is, you can’t average the averages of the CSRS and FERS participants to come up with the average balance for all participants.

      • Mike Zunino says:

        Very good reply and correct math!

      • OldRet says:

        I don’t see how that example makes sense in relation to this article because they are already talking about averages. You can’t have two averages (CSRS & FERS) at $88K and produce an average of $68K without another variable not mentioned in the article. The fact is that variable is the TSP balances for military (neither FERS or CSRS) is only 13K and THAT is what brings the average TSP balance down to $68K.

    • FedSmith says:

      The average for military personnel is much less than the balances for civilian employees. We focused on the civilians since the vast majority of our readers are not military personnel. We discussed TSP balances in more depth at: http://www.fedsmith.com/2012/1

  8. msgrowan says:

    Excellent article.  It provides solid, reliable -if at times unwelcome but necessary - information needed by TSP account holders, many of whom, unfortunately, are often unduly influenced by short-term, roller coaster-style emotions and unfounded rumors.  The datum regarding the Treasury Department’s report that government borrowing increased, to the point that, for the first time in recent memory to my knowledge, over half (51.6 cents) of every Federal dollar spent in November came from borrowed funds should raise major concerns in us all.  We are indeed living in perilous times for our nation.

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