The National Debt and How it Impacts Your Retirement and the G Fund

Another few months have passed since the debt ceiling was raised and time for another raise in our debt. How will your retirement annuity payments and your G fund investments be impacted?

It is that time again.

As our federal debt continues to spiral higher, the current debt ceiling limit of $16.7 trillion isn’t high enough to pay for government spending. The $16.7 trillion debt ceiling went back into effect on May 19 after being suspended earlier this year by Congress.

Earlier this year, Congress voted to suspend the debt ceiling limit until mid-May to avoid the risk of default and focused on sequestration to try and stop the spiraling federal debt. In what we now consider good news, the federal budget deficit will only increase by  $642 billion this year. The deficit last year was $1.1 trillion.

The debt limit debate has an impact on federal employees even if they are unaware of it.  On May 21st, the Treasury Department declared a “debt-issuance suspension period” under the statute governing the Civil Service Retirement and Disability Fund. That allows the federal government to redeem existing Treasury securities held by the fund as investments, and suspend new payments. The reason for the action is that each month the debt-issuance suspension is in effect, there is about a  $6.4 billion reduction in federal expenses, according to the Treasury Department.

This does not mean that civil service benefit payments will be canceled. Money will still be distributed and those impacted will not be affected by the action—just as happened the last few times this occurred. After the debt ceiling is raised, the money will be repaid.

The suspension period will be from May 20 to August  2nd according to the Treasury Secretary.  Additional investments of amounts credited to Postal Service Retiree Health Benefits Fund will also be suspended during this period. According to the Treasury Department, this action will provide about $19 billion in “headroom under the debt ceiling). (See also, How Much Do You Know About Funding of the Federal Retirement System?)

While the G fund is not impacted as of today, it will be in the near future. According to Kim Weaver, the Director of External Affairs for the TSP, “We anticipate that the G Fund will be impacted in the upcoming weeks, but it has not happened yet.”

In other words, as the debate continues on the debt ceiling, the G fund will be used as one way to offset the current federal deficit. As many readers are aware, the G Fund consists of special-issue Treasury securities that are only available to investors in the Thrift Savings Plan. As a way of delaying the inevitable run-up against the debt ceiling, the Treasury Department will begin “disinvesting” in the G fund.  In effect, the Treasury stops issuing these special securities. The result is to remove this source of federal debt and giving the government more money to spend on current expenses. Investors in the G fund have never lost money as the account balances continue to accrue earnings. Also,  loans and withdrawals are not impacted.

When the “disinvestment” period ends, the securities are reconstructed as if the suspension had not occurred. In short, the G fund is used as an accounting gimmick to give the federal government more time to work out the problem with the debt ceiling. Presumably, the ceiling will again be raised by some amount before there is a government default. That makes some G fund investors uncomfortable. In the long run, it has not made any difference in the value of the investment.

If this seems familiar, it is not your imagination playing tricks. This is a replay of an event that has occurred before. As our debt continues to spiral, using the G fund to prop up government spending is happening more frequently. (See, for example, Using the G Fund to Help Fund Federal Expenses and The “Debt Issuance Suspension Period” and $186 Billion of Your Retirement and TSP Funds.

The Debt Ceiling and Your G Fund Investment

As we approach the new, larger debt ceiling, the Secretary of the Treasury has 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.” This is where your Thrift Savings Plan comes into play; specifically, the G fund.

The “G” fund is invested in interest-bearing Treasury securities that comprise part of the public debt. This is the reason the G fund is often described as an extremely safe, conservative investment for TSP investors. 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. 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.

What Will Happen Next?

No one knows with certainty how the current situation will evolve. In the past, the debt ceiling has generally been raised. That is likely to happen again after wrangling in Congress on how much the debt limit should be raised and, for Republicans at least, how to try and bring federal spending within the revenue received by the federal government. A plan has been emerging in the House that would raise the debt limit but also contain spending cuts, a framework for tax reform and a “jobs” element which would probably be related to the Keystone XL pipeline.

It is unlikely there will be a resolution in the next few weeks and the debt ceiling and some of the issues surrounding it will probably not be resolved until sometime in the Fall. This means there is very little likelihood the G fund will avoid being used  again as one way to have the government continue paying its debts.

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