The Debt Ceiling and Your Retirement Funds

Investors in the TSP’s G fund could be considered patriots for having their retirement investments used to help with the nation’s debt. Unfortunately, it isn’t voluntary as the government uses these funds to finance the debt because it has the authority to do so.

Federal employees who are sitting home and wondering when they will be called back to work could be forgiven for not realizing that a larger problem is upon us.

The problem is the debt ceiling. More accurately, the problem is the amount of debt that has been accumulated by the federal government of the United States. In effect, we are running a government based on debt that comes from a variety of sources.

With about $17 trillion of debt, each American citizen’s share of that is about $53,000. Unfortunately, this $17 trillion ignores the bulk of the debt as it does not include the off-balance-sheet expenses.  According to a study by the National Bureau of Economic Research the government had $70 trillion in off-balance sheet liabilities, as of 2012.

There is plenty of room for political theater in all of this. The administration creates a scenario of financial apocalypse if the debt ceiling is not raised. The Republicans paint a scenario of an incompetent, free-spending administration incapable of any financial restraint. There is probably enough truth in both sets of talking points so that partisans for both parties can jump on the bandwagon.

The Federal “Slush Fund” Aided by Federal Retirement Funds

The  federal government actually hit the debt limit on May 17, 2013.  Since that date, the Treasury has been enacting “extraordinary measures” to buy extra time and money.  This fund to continue to fund the government consists primarily of accounting maneuvers. In past years, there has been a great deal of publicity about hitting the debt ceiling and its impact on the public. May 17th passed this year without wasting much time on publicizing it. No doubt, the vast majority of the American public is unaware that it happened.

In effect, the Department of the Treasury finds other ways to spend another $260 billion by borrowing from other government accounts. This is where our readers and their money come into play.

The Government Securities Investment Fund (G Fund) is one of these other government accounts used to fund the government. The G Fund holds approximately 40 percent of all Thrift Savings Plan’s (TSP) balances. As most readers know, the TSP is similar to a 401(k) retirement fund for about 4.6 million current and former government employees and uniformed service members. To make up for the deficit spending by the government, the Treasury has “suspended reinvestment” or taken assets out of the G Fund to pay for other expenses.

So, for those readers who have their investments in the G fund, thank you for your patriotism in helping to fund deficit federal spending. No doubt, many of these investors are unaware that it has occurred.

This is not the first time this has occurred. In fact, it has become fairly routine. (See Withholding G Fund Payments to Avoid the Debt Ceiling) I am not sure why the lack of publicity this time around; perhaps it was an attempt to create more drama and bargaining leverage as the “extratraordinary measures” taken by the Treasury no longer are sufficient to keep up with current spending levels.

This is a statement made by the TSP in similar situations that have occurred previously:

“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, the difference between the real rate of inflation and the official inflation rate, and what you will be able to purchase with your American dollars in the world marketplace.

What Happens if the Debt Ceiling is Not Raised?

All G fund investors will get their money back as soon as the debt ceiling is raised. Congress has raised the debt ceiling 78 times since 1960 but it is not obligated to do this.

One FedSmith reader asked this question:

“If the government were to default on its debt, what would happen to the money on the G Fund?”

Good question and the answer is that no one knows with any certainty.

A writer for Forbes magazine recently asked the Treasury Department what would happen to the retirement accounts of these TSP investors if the debt ceiling is not raised. According to Forbes: “Treasury has no answer to this question.”

Prioritizing Payments

If the debt ceiling is not raised, it does not mean that the federal government is out of money. Interest on the federal debt could still be paid. But the administration would be facing hard choices. Which government programs would be cut to cut spending?

The Congressional Budget Office projects more than $3 trillion in revenue for the federal government for fiscal year 2014. That is the largest amount of federal revenue in the nation’s history. That does not include the impact of inflation, the number of people in the country and the purchasing power of the money received. But, by any measure, the federal government takes in a great deal of money.

The problem is that the government spends much more than it receives. In effect, the government would still have the $3 trillion to spend but would have to cut spending somewhere if the debt ceiling were not lifted. This does not mean we would avoid a substantial economic impact or that the G fund would be repaid.

Other options may also be available to the government although they are certainly not high on anyone’s list! As we pointed out during an earlier debt ceiling debate, some European countries (France, Ireland, Bulgaria and Hungary) have used or seized retirement assets to fund the their national debt. (See The Debt Limit and Your TSP Fund)

While this would be an extraordinary event that isn’t likely to happen, most Americans did not see the country going from the world’s largest lender to the world’s biggest debtor in a relatively short time either. (In fact, our external debt per person is greater in the U.S. than it is in Hungary).

Leaders of our two political parties are at loggerheads and it appears that the differences are both personal and philosophical. While filling the airwaves by insulting the other side makes for good political theater, it also makes it more difficult to reach any substantive agreement.  Eventually, the electorate and politicians may decide that we have to reduce the nation’s debt. But, from the experience of numerous other countries, that is unlikely to happen as politicians get elected by promising not to cut any federal benefits or programs and the electorate usually goes along with that approach. The lack of an agreement, and lack of respect either side shows for the ideas or personalities from the opposing faction, leaves open the possibility of other extraordinary measures being taken to keep the country afloat and to deal with the nation’s increasing debt load.

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