Preparing for the Debt Ceiling Debate and the Impending “Fiscal Cliff”

How will your investment in the G fund and your federal retirement funds be used if there is no resolution on the debt ceiling?

Does the possibility of the “fiscal cliff” or hitting the debt ceiling limit (again) impact the investing habits of federal employees?

The last report we have from the Thrift Savings Plan is for the month of October. We do know that the prices of stock funds in the Thrift Savings Plan went up in November. Were federal employees putting their money into these stock funds in hopes of the nation’s financial issues being resolved with a positive impact on stock prices resulting from the political resolution?

While stock prices went up in November, the actions by TSP investors reflected a more conservative mood. In October, investors removed money from the C, ($126 million) S ($108 million) and I ($29 million) funds. Even more money was transferred out of the F fund ($126 million). The money went into the G fund ($172 million) and the L funds ($138 million).

The Debt Ceiling and Your G Fund Investment

These actions would suggest that TSP investors were more concerned about the safety of their investments in stocks and, instead of staying invested in stock funds, fled to the safety of the G fund or the more diversification offered by the lifecycle funds. It is also a good bet that the possibility of the federal government using the G fund to help fund government expenses if there is a delay in raising the debt ceiling was not a consideration for many of those that transferred their money into the G fund.

If you have forgotten or did not know about previous actions by the federal government when Congress has not approved an increase in the debt ceiling, here is a news flash. There is a good chance that your G fund investments will help fund the government while the political scenario is played out in Congress and in the media.

The existing debt ceiling is probably going to expire late in December or early in January. The reason is because the federal government is spending money much faster than it receives in revenue so it keeps borrowing more money. On December 12, 2012, the US Treasury Department reported that the federal Government had a budget deficit of $172 billion for the month of November, an increase of 74.8% over the monthly budget deficit for the prior year. With total outlays of $334 billion for the month, this means the government borrowed 51.6 cents for every dollar it spent.

The federal government is currently allowed to borrow up to $16.4 trillion dollars. We are rapidly approaching that number. To continue to borrow more money, that limit will have to be raised again. The American Constitution provides that borrowing money requires congressional action. In Article I, Section 8, Congress is granted the power “to borrow money on the credit of the United States.” The Obama administration has proposed to give the power to the president to borrow the amount of money he considers necessary. No doubt, any attempt to eliminate Congress from this process will trigger a new political debate and eventually end up in court if there is no political solution reached between the administration and Congress.

The last time the debt limit was reached was in August 2011. No one knows how this situation will play out in the political arena this time around. There is a good chance that federal employees will again be involved in the process through their investments in the TSP. 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 if the debt limit is not raised by Congress.

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.

There is no long term impact on federal employees or investors in the Thrift Savings Plan. But, despite the history of everything coming out well in the end, the fact that the retirement investments are used as part of the political negotiating process makes many current and retired federal employees uncomfortable.

The Average TSP Balance

As of August 31, 2012, the average TSP balance was $68,452.93 according to the folks at the TSP.  For those employees under CSRS, the average TSP balance as of August 31st was $88,373.90. Most of these investors are older as the FERS system has been in existence since 1986. The average TSP balance for FERS employees as of August 31st was $87,720.21.

As of October 2012, 41% of investors’ TSP balances are invested in the G fund. 24% of investments are in the C fund, 8% of investors money is in the S fund, another 8% in the I fund, 5% in the F fund and 14% is invested in the lifecycle funds.

As of the end of October,  more than $136 billion has been invested in the G fund. Total assets in the TSP are now more than $324 billion.

There are certainly reasons to be concerned about investments but the reality is there isn’t much most Thrift Savings Plan investors can do about the fiscal cliff or the debt limit. In the long run, chances are that those that diversify their investments will do well. The debt limit debate will irritate or scare some investors if the G fund is used to fund government expenditures but there is unlikely to be an impact on their investments other than personal discomfort. We cannot predict what will happen with the fiscal cliff negotiations other than knowing that some taxes will go up, some taxes will go up a great deal, and there is likely to be less money for individuals to spend as the amount going into government coffers and the amount spent by the federal government continues to go up. Those that put most of their money into the G fund are likely to lose purchasing power but retain their initial investments and see a small return each year. Those that invest in stocks have the possibility of their assets increasing but with more risk to their initial investment as the market may be volatile–at least until a political settlement is reached.

In short, take care in making your investment decisions with close attention being paid to the length of time before you are likely to need the assets in your TSP. Those who are now retired or are about to retire will likely need that money sooner and will probably be more conservative. Those with a longer time frame may find that their assets will grow over time and that the current political and economic considerations are no more than a small blip on stock prices over time.

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