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Using the G Fund to Help Fund Federal Expenses

by Ralph Smith |

During the Christmas holidays, everyone gets preoccupied with the events surrounding friends and family and the spirit of the season.

While New Year’s day isn’t until next week, those that invest in the G fund for their current or future retirement always find it of interest when there is a debate about raising the debt ceiling. The reason: The federal government has to come up with money until the debt ceiling is approved. Your G fund investments will help fund the government while our elected representatives haggle and debate over what to do about the ever increasing debt and the need to, yet again, increase the amount of debt that can legally be incurred by the government.

The Treasury recently announced a series of measures that will delay the day the government will exceed its legal borrowing authority as imposed by Congress. These steps could delay the inevitable for up to two months depending on how much the government spends each day beyond what it takes in during that time.

One of these first measures to be taken by the Treasury Department is to suspend investment in the G fund and, presumably, the Civil Service Retirement and Disability Fund. According to Treasury Secretary Timothy Geithner, these steps, including suspending investments in the G fund, “can create approximately $200 billion in headroom under the debt limit.”

How Much Are We Borrowing?

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 and we will reach that number in the next few days. The 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, as has been suggested by some who would prefer that the president incur additional debt without Congressional approval, will trigger a new political debate and eventually end up in court if there is no political solution reached.

To put the current level of government spending into perspective, the Office of Management and Budget (OMB) figures show that in 2007 , the year before the last recession took hold, federal receipts were $2.568 trillion. Expenses totaled $2.728 trillion.  The estimated receipts for 2012 are $2.468 trillion or about $100 billion less than in 2007.  The real problem is how much we spent. The government will spend about $3.795 trillion in 2012 or more than $1 trillion than we spent in 2007.

The 2012 $1.1 trillion deficit was $953 billion (in inflation-adjusted dollars), or 547 percent greater than the pre-recession deficit in 2007.

The deficit spending has been as much as $1.4 trillion in 2009 and has exceeded $1.2 trillion each year from 2009 – 2012. That rate of spending is obviously the reason we keep hitting the debt ceiling every couple of years.

For those with an interest, here are the figures from the Office of Management and Budget:

Year Receipts Outlay Deficit
2007 2,567,985 2,728,686 -160,701
2008 2,523,991 2,982,544 -458,553
2009 2,104,989 3,517,677 -1,412,688
2010 2,162,724 3,456,213 -1,293,489
2011 2,303,466 3,603,061 -1,299,595
2012 estimate 2,468,599 3,795,547 -1,326,948
2013 estimate 2,901,956 3,803,364 -901,408

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.

Your G Fund and Previous Debt Ceiling Limits

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.”

Why is the G Fund Different Than Other TSP Funds?

The Thrift Savings Plan (TSP) is similar to employer-sponsored “401(k)” plans in the private sector. The Thrift TSP consists of individual accounts owned by employees and former federal employees who participate in the plan. Your contributions to the TSP and contributions made by your employing agencies are credited to a deposit fund in the Treasury Department.

Here is where the G fund is different from the other TSP funds. The “G” fund – is invested in interest-bearing Treasury securities that comprise part of the public debt. In fact, this is the reason that the G fund is often described as an extremely safe, conservative investment for federal employees. The securities that are in the G fund are issued to that fund–the Treasury securities in the G fund are short-term securities that are not available to the general public.

On the other hand, since the G fund becomes part of the trillions of dollars in debt held by the federal government, a portion of the G fund becomes part of the accounting procedures used to avoid increasing the debt limit.

The Long Term Impact on Your G Fund

Previously, G fund investors have not been harmed by actions taken by the Treasury. We do not anticipate there will be any long term harm to G fund investors in this round of negotiations either. No doubt, despite the history of everything coming out well in the end, the fact that federal employee retirement investments are used as part of the process makes many current and retired federal employees uncomfortable.

Moreover, with each new round of negotiations, the problem is much worse than it was previously.

When the debt ceiling limit was last raised in 2011 the debt ceiling went from $14.29 trillion to more than $16.39 trillion. We don’t know what the next debt ceiling will be, perhaps as much as $20 trillion or so. Of course, the federal government pays interest on the money that it borrows. While interest rates are currently at historically low levels, largely as a result of the Federal Reserve printing money and buying much of the debt, in 2011, these interest payments claimed $230 billion, or about 6 percent of the budget. Since the government is printing a large amount of money each month which is then used to purchase the government debt, there are inflationary pressures building in the economy. When or how large the ultimate inflation will be remains to be seen.  But, when interest rates do finally go up, the amount of money spent by the government to finance the debt will go up rapidly.

In short, the current debt ceiling debate is only part of the problem. And, in addition to the pay freeze that has been in effect, federal employees are also helping with the problem through the involuntary use of G fund as explained above.

© 2014 FedSmith Inc. All rights reserved. This copyrighted article may not be reproduced without express written consent of FedSmith Inc.

About the Author

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Ralph Smith

Ralph Smith is one of the founders of FedSmith.com. He writes in a blunt, entertaining style with a viewpoint that reflects an in-depth knowledge of federal HR issues.

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Daily TSP Rates

April 23, 2014

Fund Last Change YTD
L Income 17.0052 -0.0039 +1.12%
L 2020 22.1247 -0.0201 +1.51%
L 2030 23.8515 -0.0302 +1.67%
L 2040 25.2749 -0.0396 +1.78%
L 2050 14.3237 -0.0259 +1.85%
G Fund 14.3916 +0.0010 +0.73%
F Fund 16.1682 +0.0360 +2.71%
C Fund 24.3784 -0.0506 +2.11%
S Fund 34.1199 -0.1856 +1.33%
I Fund 25.9714 -0.0004 +1.59%
More TSP Rates | Track Your Investments