We have recently run articles on the tobacco legislation just passed by the House of Representatives this week. The purpose of the legislation is to protect public health by providing the Food and Drug Administration with authority to regulate tobacco products. Most readers would not have inferred from the name of the bill that the legislation would also increase annuity payments for some federal employees who are in the FERS retirement program–without regard to whether they choose to smoke or otherwise use tobacco products.
Oddly enough, the importance of this legislation to federal employees does not end with the change to the federal annuity payments.
As the funds in the TSP plan are now about $226 billion, the target is getting more attention and Congress isn’t generally known for ignoring large amounts of money that can be used for its own purposes. Last week, we noted in an article on “Quietly Changing the TSP’s Investment Philosophy” that some in Congress want to create a foothold to give companies owned by women and minorities a bigger piece of the fees coming from the TSP by changing the investment philosophy of the federal Thrift Savings Plan.
In case you missed it, the new legislation on regulating tobacco just accomplished that exactly as outlined in last week’s article. The legislation gives the TSP board the ability to begin putting TSP money into “other investment options, if the Board determines the options to be appropriate retirement investment vehicles for participants” without further Congressional approval. We can reasonably anticipate this has been noticed by the lobbyists representing the firms that will benefit from this change and the pressure on the board to open up the TSP to other investment options will increase dramatically if the House bill is also passed by the Senate. (See Money, Congress and Your TSP: Watch Out for Your Retirement Money)
There is also another link between the Thrift Savings Plan and the tobacco legislation.
Under Congressional “pay as you go rule,” new legislation that would cost money has to be offset somewhere else. In the case of the tobacco legislation, the question was: Where would the necessary $300 million come from to fund the new bill?
According to the Chairman of the House Oversight and Government Reform Committee, Henry Waxman (D-CA), the necessary $300 million will come from the Thrift Savings Plan. According to one report: “Provisions in the bill dealing with retirement accounts had a sufficient amount of savings left over to offset costs associated with the tobacco bill provisions.”
At first glance, one has to wonder how the money will come from the TSP to fund the tobacco bill. Here is the answer. As we noted last week, the legislation says that the TSP Board “shall by regulation” include “a qualified Roth contribution program, under such terms and conditions as the Board may prescribe.” In other words, the bill would establish authority for setting up the Roth IRA option within the TSP.
So, how will this new legislation on the TSP save the government money? It isn’t obvious and, if you are not cynical about the intent of Congress yet, this may help move you along. Note that any savings from new legislation does not have to come about during the current decade. And, if one pushes the savings rationale ahead by a few years, who will know or care if the figures were false anyway?
The Congressional Budget Office (CBO) says in its report that the new TSP legislation “would cost $10 million in 2009 and $279 million between 2009 and 2013, subject to appropriation of the necessary amounts.” In other words, the new TSP bill will actually cost about $279 million more than the current TSP program over the next five years.
Since there will be an increase in expenses, one still has to wonder about the source of the $300 million in savings cited by the California Congressman.
The savings will eventually show up, says the CBO and, by 2018, the taxpayers will be way ahead of the game. In addition to costing $279 million by 2013, the new TSP legislation “would also increase revenues by an estimated $157 million over the 2009-2013 period and nearly $1.3 billion over the 2009-2018 period.” The savings would come about because of federal employees converting to a Roth IRA. “Establishing a Roth contribution program would result in some TSP participants electing to contribute after-tax income to their retirement plan rather than contributing pre-tax amounts….”
In short, there is enough truth in the proclamation that the TSP will result in saving the taxpayer money so that it is not a complete lie–it just means waiting another decade or so for the savings to really have an impact.
No doubt, this will reassure all TSP investors that Congress is looking out for the safety of their financial future. And, as loyal public servants, knowing that savings from the TSP will help fund a new government program will probably give all TSP investors a warm, fuzzy feeling knowing that they are helping protect Americans from making the wrong choice when they light up a cigarette.
Here is the report from the Congressional Budget Office.