The Debt Limit and Your TSP Fund

How safe is your TSP in a major recession and with extraordinarily large government debt as a common topic in the media?

Some in the federal community may feel somewhat removed from the nation’s economic crisis. Our jobs are relatively secure, the pay isn’t bad, and our retirement system is pretty good–and often cited as a model system for the rest of the country to emulate.

Without a doubt, we are now starting to feel some of the heat.  A two-year federal employee pay freeze will certainly be felt in your paycheck, especially since the cost of some essential goods and services are going up and there is the possibility of inflation damaging the purchasing power of the dollar. Retirees have not had a COLA increase for two years even though the cost of health insurance is going up as well as other expenses that are often felt more by retirees than those who are still working.

But, with the unemployment rate at close to 10% for an extended time and the real unemployment rate hovering at 18% or so, having a secure job with a good retirement system and decent benefits is not a bad position in which to find yourself on today’s economy.

We have been very fortunate to live in America. Most Americans have faith in the federal government to provide services without taking away our personal freedom or too much of our hard-earned money. Most of our readers are working or used to work for the federal government and probably have at least as much or more faith in trusting the government to treat people fairly.

There is one area that may bear watching and which many readers may not have thought about in terms of its potential personal economic impact.

In all likelihood, the problem with our national debt will play out in ways that are unexpected and unpredictable. Without a doubt, the federal government is broke and this massive debt will continue to put our country in danger in different ways. Ultimately, all of us will end up feeling some economic pain as our political system addresses the problem or ignores it.

European countries have similar problems. One way in which several national governments have tried to resolve their economic problems is taking money from retirement systems where the money was to be used for financial support of the contributor after retirement.

The Christian Science Monitor recently summarized the retirement pension situation in several countries. While we may not be surprised at the government’s actions in Hungary and Poland, we may be more surprised at what has happened in France and Ireland. 

Last November, the French government decided to earmark 33 billion Euros from the national reserve pension fund to reduce the nation’s deficit. In Ireland, a fund was created to support Irish pensions from 2025-2050 and to provide pensions for some public sector employees. In 2009, the Irish government earmarked four billion Euros from the fund for bank rescue. The remainder was taken in 2010 to support the bailout of the rest of the country. 

Hungary was more direct. It told its citizens to give their retirement savings to the government or, alternatively, lose the right to the state pension while still being forced to contribute money to it from their paychecks. The plan gave the government control over $14 billion of individuals’ retirement money. Bulgaria instituted a similar program. No doubt, that helped the nation’s debt problem. It also created a problem for those who were going to use the money for retirement.

A few days after the Christian Science Monitor article appeared, the Wall Street Journal ran a news item about America’s debt ceiling. Here is one paragraph from that article: 

“Even if the debt ceiling is reached this time, the Treasury has tools at its disposal to keep the government from defaulting on its obligations, though they aren’t unlimited. It can stop issuing bonds that don’t go directly to the market and exist primarily in accounting ledgers, including those that would go to the so-called G-fund—a money-market fund in government retirement plans—and the Civil Service Retirement Fund.”

This has actually happened before. (See “We’re the Federal Government: You Can Trust Us”) The Thrift Savings Plan published a note on its website that said, in effect, “Don’t worry about your TSP investment in the G fund. It is still safe, the action being taken is legal and any money due will be restored.” And, in fact, it was restored. The government just used it for awhile until it resolved the debt ceiling problem.

While some readers tend to see events in purely political terms and blame the party with which they do not affiliate as the source of their problems, the reality is somewhat different.  The same government action has occurred under President Clinton and President Bush.

Moreover, it is likely to happen under President Obama. No one can predict with certainty how Congress and the Obama administration will deal with the debt limit problem. But, if it is not resolved and time is spent while the nation’s leaders try to work out a solution to raising the debt limit while not destroying the country’s economic situation, you can be assured that the scenario in the Journal article is likely to play out. 

In a 2006 reader survey, 84% of those responding thought the federal government should not use money in the G-fund to eliminate short-term problems with the debt ceiling. But, keep in mind, whether you like it or not, your retirement money is controlled by the federal government and, if convenient or necessary, chances are it will be used again to shore up the finances of the national government.

No one knows if the debt ceiling will be raised before the financial markets take a hit or not. There is even considerable disagreement about whether raising the debt ceiling without major changes in federal spending is a good idea. 

There are also different circumstances now than when a similar situation occurred in the past. The situation today is more volatile than it was in 1996 or 2006 as our debt has gone up, federal government spending is up dramatically, and our economic situation has deteriorated.

In 1996, Japan, the United Kingdom and Germany were the biggest holders of American debt. The majority of our debt held by foreign countries is now held by China, Japan and the U.K. This could put more pressure on the American government, especially if the dollar is viewed by international investors as a less reliable currency than other currencies. It is conceivable that TSP investors (and others) will see the value of their stocks dropping at the same time the G fund is used by the federal government to help with the debt problem.

In short, there is likely to be turmoil in the next several months. The problem could be pushed aside (again) in hopes of an improving economy in coming months. The problem could be addressed in a substantive way and steps will be taken to lessen the debt problem by reducing spending in some way. Or, perhaps, the political factions will dig in with their respective positions and we will see the government engage in an economic version of “chicken” to see which side gives in while the financial markets drop at the prospect of an American nation more beholden to foreign powers that may not share our values.

For TSP investors, the reality is you do not have many good options. For any investment funds outside of the TSP, the Journal quoted Aaron Gurwitz, the chief investment officer at Barclays. His advice: “The best move for investors…would be to diversify their holdings of dollar-denominated securities to include other developed nations, including Canada and the U.K., and stable emerging markets.”

You may want to watch your TSP and how the government handles the current problem. It is likely that the G fund will be used to help with the debt problem. It is also very likely you will get the money back as happened previously when the debt limit had to be raised (although for much less debt than we now have). Ultimately, it is your money even if you do not have full control over it.

Anyone who has complete faith in any government to do the right thing has probably not studied much history. Events and governments change. Europeans who thought their money was safe with their government probably felt very secure about their future retirement–until policies changed that had a negative impact on many people and increased their reliance on family or government to take care of them in their old age. While that is unlikely in the United States, is isn’t impossible either. 

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