What Happens to Your TSP Funds If the Debt Limit is Not Raised?

With America’s crushing debt being the subject of continuing debate in Congress, the next step in the political process will be the question of raising the debt limit.

We know from past experience that the Treasury Department can use some retirement funds of federal employees to avoid increasing the debt limit which is capped by law. That is likely to happen again in the current political environment if the debt limit is not raised.

Without getting into the issue of whether the debt should be raised, what happens to your TSP funds if the debt limit is not raised?

We have received queries from readers wanting to know what happens to their money in the G fund if the debt limit is not raised since they have read that the TSP fund is impacted when the federal government has reached the current debt limit. Rather than try to answer these queries individually, we have prepared this information for our readers to help answer some of the more common questions.

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.”

What Happens to the G Fund?

When this is done, 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.”

So, in effect, the G fund in the Thrift Savings Plan is impacted and the Civil Service Retirement and Disability Fund is impacted as Treasury securities are not issued for these funds when there is an on-going debate and Congress has not raised the debt ceiling again.

This has happened in the past. While the action creates consternation and concern among investors in the TSP’s G fund, the reality is that the process is an accounting gimmick to buy more time to avoid a default and there has not been a long-term impact on G fund investors.

Quoting again from the Congressional Research Service report: “Consequently, neither the Civil Service Retirement and Disability Fund nor the “G” fund of the TSP can suffer any reduction in assets or loss of interest income as a result of the actions taken by the Secretary of the Treasury under the authority of sections 8348 and 8438 of title 5, United States Code.”

Why is the G Fund Different Than Other TSP Funds?

The Thrift Savings Plan (TSP) is similar to employer-sponsored “401(k)” plans in the private sector. The Thrift TSP consists of individual accounts owned by employees and former federal employees who participate in the plan. Your contributions to the TSP and contributions made by your employing agencies are credited to a deposit fund in the Treasury Department.

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.

Here is how it works:

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.

In the long run, there will not be any impact on investors in the G fund. This statement is from the Thrift Savings Plan and will likely again appear on the TSP website in the next few days as we get closer to reaching the debt limit (the full statement appears at the end of this article):

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.

So, in other words, nothing is likely to happen to your money invested in the G fund account or any money you may be investing in the G fund account in the future. The biggest danger to your money in the account is probably the falling value of the dollar and what you are able to purchase with your American dollars in the world marketplace.

Statement from the TSP

Absent legislation by Congress to raise the Federal debt limit, the Secretary of the Treasury may determine that portions of the monies in the G Fund cannot be reinvested in Treasury securities because to do so would exceed the present Federal debt limit. However, all of the G Fund monies would still be on ac­count with the Treasury, and the interest which would accrue if the G Fund were fully invested would still be credited to the G Fund.

Some published reports have mischaracterized the actions which may be taken by the Treasury, which are authorized under the law. G Fund investments are safe and will continue, by law, to accrue earnings. The integrity of the G Fund would not be compromised. TSP participants’ accounts would not be affected as a result of any suspension of issuance of Treasury securities to the G Fund.

This is possible because of the “make-whole” provision con­tained in the relevant section of the Thrift Savings Fund Invest­ment Act of 1987 (P.L. 100-43), 5 U.S.C. § 8438(g)(4), covering this very situation (i.e., a suspension of Treasury securities issuance because of the debt ceiling). 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.

A Congressional Research Service memorandum explaining the use of Federal retirement funds during debt issuance suspension periods was issued on March 20, 2002. This report accurately describes the actions which may be taken by the Secretary of the Treasury and the com­plete protection of TSP participants’ G Fund accounts afforded by the make-whole provision. The General Ac­counting Office issued a report on August 30, 1996, (AIMD-96-130) con­firming that the statutory make-whole protection (which re­mains in effect) was properly implemented when it was used in 1995-96.