Borrowing from the G Fund (Again) to Offset the Debt Ceiling

By on February 5, 2014 in Current Events, Retirement with 50 Comments

As the federal government keeps spending money it does not have without borrowing or printing more, the Department of the Treasury has announced that it will again be using “extraordinary measures” to keep the government afloat as the debt ceiling limit will again be reached.

In his statement, Treasury Secretary Jack Lew stated: “Last year, Congress passed a temporary suspension of the debt limit that lasts only through February 7, which is the end of this week. After that, in the absence of Congressional action, Treasury will be forced to use extraordinary measures to continue to finance the government.”

The national debt now exceeds $17 trillion which equals about $54,563 per person and $150,308 for each taxpayer in the country. In a new Congressional Budget Office (CBO) report, the CBO predicted that the federal budget deficit will fall to $514 billion this year, down from last year’s $680 billion and the lowest by far since President Obama took office five years ago. (The debt increase was $1.4 trillion in 2009.)

We do not know when the next debt ceiling limit will be raised but there is little doubt it will be raised. In the meantime, many federal employees are contributing to financing the operation of the federal government whether they know about it or not. The reason is because the G fund assets within the Thrift Savings Plan (TSP) are used by the federal government to help meet expenses. Also, the Civil Service Retirement and Disability Fund provides benefits to retired and disabled federal workers covered by the Civil Service Retirement System. This money is invested in special-issue Treasury bonds. The federal government also borrows money from this source to keep the government running.

The Government Securities Investment Fund (G Fund) is one of these other government accounts used to fund the government on a short-term basis. There are assets of about $397 billion in the TSP. The G Fund holds approximately 37 percent of all TSP balances held by the 4.6 million TSP participants.  As most readers know, the TSP is similar to a 401(k) retirement fund for about 4.6 million current and former government employees and uniformed service members.  To make up for the deficit spending by the government, the Treasury has “suspended reinvestment” or taken assets out of the G Fund to pay for other expenses.

This is not the first time this action has occurred within the G fund. In fact, it has become a routine action taken by the Treasury Department as the federal government keeps spending money at an extraordinary rate above the amount that is received each year.

This is a statement made by the TSP in similar situations that have occurred previously:

“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.”

When the “disinvestment” period ends, the securities are reconstructed as if the suspension had not occurred. In short, the G fund is used as an accounting gimmick to give the federal government more time to work out the problem with the debt ceiling. Presumably, the ceiling will again be raised by some amount before there is a government default. That makes some G fund investors uncomfortable. In the long run, it has not made any difference in the value of the investment.

Each time this occurs, readers ask why the federal government can use retirement funds to fund the government. Here is a quote from the Congressional Research Service:

“Congress has granted to the Secretary of the Treasury the authority to take certain actions that allow the Treasury temporarily to continue borrowing cash from the public without increasing the public debt. The Secretary is authorized to take these actions, which effectively reduce the obligations of the government that are counted toward the public debt ceiling, only during a “debt-issuance suspension period.”

When “extraordinary measures” are taken, 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.”

Here is how it works

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 Secretary of the Treasury cannot sell or redeem Treasury bonds held by TSP participants.

But the Secretary does have the authority to “suspend the issuance of additional amounts of obligations of the United States, if such issuance could not be made without causing the public debt of the United States to exceed the public debt limit.”

The G fund matures and is reinvested daily. Rather than reinvesting the full balance of the G fund, the Secretary can (and probably will) credit some or all of the balance of the fund to non-interest-bearing accounts in the Treasury. These non-interest-bearing accounts do not count against the public debt limit.

 

© 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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