Financial Security, Social Security and the TSP

Some federal employees have made poor investment decisions in their TSP. Does this mean that private investment accounts should not be used for investing a portion of payroll taxes?

The debate is raging throughout America on whether Americans should have access to private investment accounts similar to the federal government’s Thrift Savings Plan (TSP).

According to an article in USA Today, most Americans are poor investors. They don’t understand the options available to them for their investment dollars. They often buy stocks when prices are high and sell them when prices are low. They sometimes buy bonds just as interest rates are taking off and the real rate of returns on bonds is about to go down. Often they don’t invest at all because they procrastinate so they don’t take advantage of investment opportunities available to them.

On the other hand, many Americans believe that it’s their money and they should get to invest it the way they want without the government doing it for them. In other words, they don’t want the government running their lives just because some people screw up. These people want the freedom to make a ton of money or to lose it–without having a federal agency involuntarily take their money and invest it for them.

And here’s a new argument on the Social Security debate raised in the USA Today article. It goes like this: Federal employees have access to a model retirement program with a limited number of choices in the TSP. Even with limited choices, these investors have made poor investment decisions and it proves the American public can’t be trusted to invest their own money either. See “A Model Retirement System? How Did This Happen?”

Without taking a position on whether this argument is valid with regard to the Social Security debate, we have previously published an article that shows federal employees are subject to the same investment emotions as other investors and that their TSP results were hit hard as a result of bad investment decisions.

In part, the vociferous debate on Social Security investments reflects a different philosophy among Americans. Consider it an extension of the same vociferous debate that ran during the presidential election between those who supported George Bush or John Kerry.

We can reasonably expect investment professionals to do a better job of investing than amateurs. And the USA Today article is correct; many Americans make terrible investment decisions.

So there are those who argue strongly that Americans can’t be trusted to invest for their retirement and the government should do it for them. It reduces stress, reduces risk and may provide better returns in the long run.

It also takes away freedom to spend one’s own money. So there are those Americans who argue just as strongly that the government should now require them to pay into a system that denies them the ability to potentially make more money and have more security than if the government invests the money for them. They prefer the stress, want to take the risk, and want to have the opportunity to have a better retirement than they may have otherwise. They also argue that the federal government has done a poorer job of investing than individuals because there is no money in the existing Social Security fund as it is spent by Congress on other projects.

The polls taken on the debate on Social Security change; at least in large part depending on how the stock market is doing. When stocks are going up and people have more money, they want more freedom to invest. When the markets are down, they want less freedom to invest.

And what about those federal employees who may have made bad investment decisions with their TSP? In a recent poll, 48% said they would like the option of investing in private Social Security accounts while 45% did not want the option. 54% also thought that using the TSP as a model for private Social Security accounts is a good idea.

And, in a Gallup poll also published in USA Today this week, 74% of Americans are comfortable with the idea of managing their own investments. So perhaps they are naive, perhaps not educated on the risks of investing, or perhaps they just want to control their own destiny.

In short, the federal employee TSP system is again in the middle of the debate on Social Security and the role government will play in the lives of all Americans.

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