The Stock Market Goes Up and Down: Who Knew? Will We Follow the Swedish Model?

An argument that risk can and should be avoided with retirement funds by removing money from the private sector and investing in government bonds (similar to the G fund) may gain popularity in the next Congress.

If imitation is the sincerest form of flattery, federal employees may be feeling better about some of their benefit plans.

The federal employee health benefits plan is a good one and an argument that “if it’s good enough for federal employees, it should be offered to all Americans.” That probably isn’t going to happen since the average federal employee has the Blue Cross Standard Option Plan and the government spends about $12,000 to provide that coverage for its employees. Since there are about 40 million or so uninsured Americans, the cost to the taxpayer quickly adds up to an amount that is unaffordable–even if it is based on the erroneous assumption that everyone who does not have insurance could afford to pay as much as federal employees pay for the employee portion of the federal health plan.

But the immediate objective of a politician is to get enough votes to get elected. If the details of a campaign promise are such that the promise isn’t viable, chances are a campaign promise will be forgotten or changed beyond recognition after the election is over. We may see major changes to health benefits, and some of the changes may more closely resemble the federal employee health benefits plan, but it is probable that the final product will differ considerable from proposals made during a campaign.

There is another proposal swirling around in this election year that has not gotten much attention yet but is likely to create controversy in the near future even though Senators McCain and Obama are not the elected officials talking about it.

A proposal still unknown to most people would substantially change the American retirement system. The proposal sounds much like the G fund used by most participants in their TSP. The proposal to change the American retirement system would establish a special government guaranteed bond fund and most working Americans would be required to put 5% of their salary into this fund that would guarantee a return of 3% a year. While stocks have averaged about 10% a year for long-term investors, people do not like taking a risk and this proposal would, in theory, eliminate the risk of investing in stocks in return for taking away the potential for much larger long-term gains. (See Why Invest in Risky TSP Stock Funds? To Make More Money!)

America has had periodic financial panics and crises for the past two hundred years. The country has survived and we have become one of the most successful countries in the world as a result of our economic power. But this election cycle may be different. Taking a risk has become less acceptable in many areas of our lives–including our financial lives. Some of our elected officials do not like the idea of Americans taking a risk with their retirement funds and want to change how the existing system of 401(k) retirement plans–similar to the Thrift Savings Plan open to federal employees.

We have noted before that the TSP is considered a model plan and financial author Scott Burns has referred to the TSP as the platinum standard plan because of its very low cost and simplicity.

George Miller (D-CA) says that the recent stock market volatility necessitates taking a serious look at the defined contribution plans used by many Americans to save for their retirement.  In particular, he wants to study a proposal to create so-called guaranteed retirement accounts advocated by Teresa Ghilarducci, a professor at the New School for Social Research, New York.

Some of the ideas underlying this proposal will sound familiar to TSP investors. The funds under this plan would be run by the federal Thrift Savings Plan organization or a similar agency and administered by the Social Security Administration. Those investing in the plan would be guaranteed return of 3% and 5% of a worker’s earning would be put into a fund every year.

The existing tax breaks for 401(k) type plans would be eliminated. Existing plans would apparently not be abolished or taken over by the government but additional contributions would not be exempt from taxes. The underlying philosophy behind the system is apparently due to a philosophical dislike of allowing wealthier Americans (such as Federal employees) to benefit from a tax-deferred system such as that used by the TSP system. Here is an excerpt of an article that describes the type of plan favored by Congressman Miller:

“A wealthy family in a 35% tax bracket gets a tax break three-and-a-half times more valuable than a family in a 10% tax bracket, even if each family contributes the same dollar amount to a 401(k). As a result, economists at the Urban-Brookings Tax Policy Center have found that 70% of tax subsidies for defined-contribution plans and IRAs go to those in the top 20% of the income distribution…”

The accounts are reportedly similar to defined plans used in Italy and Sweden, as well as the TIAA-CREF system run for American academic institutions.

The result of any system such as this would remove large amounts of money from the private sector used by companies to grow and create more wealth within the large economy. This money would, instead, go into a government bond fund that subsidizes government debt. With front page news in this year’s election focusing on “redistribution of wealth” and the rapid fall of stock prices felt by everyone with retirement accounts that include stocks or stock funds, a proposal to radically alter the element of risk (and reward) for American investors is likely to be seriously considered.

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