The Debt Ceiling and the G Fund: Here We Go Again

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By on March 6, 2019 in Pay & Benefits with 0 Comments

Exterior of the Treasury Department Building

What is the Debt Ceiling?

The limit on how much money the federal government can borrow is called the “debt ceiling.” There was a one-year suspension on the debt ceiling but that suspension ran out on March 2.

On February 9, 2018, President Trump signed a bill suspending the debt ceiling until March 1, 2019. In effect, the new debt limit is the level of the debt on that day. On February 11, 2019, it was $22 trillion. While the U.S. Treasury estimates it will run out of money in September 2019, the exact date this will happen is an estimate.

Amount of America’s Debt

The U.S. debt is the total of outstanding debt owed by the federal government. On February 11, 2019, America’s debt exceeded $22 trillion. U.S. debt passed a milestone of $21 trillion on March 15, 2018.

When the debt ceiling is reached, the Treasury Department cannot issue any more Treasury bills, bonds, or notes. The government can only pay bills as it receives new revenue.

“Extraordinary Measures”

As a result of exceeding the debt ceiling, the Treasury Department has again started using “extraordinary measures” to prevent the U.S. from exceeding the debt ceiling.

We do not know when the debt ceiling limit will be raised. There is little doubt it will be raised as the federal government continues to spend more money than it receives in revenue.

In the meantime, many federal employees are contributing to financing the operation of the federal government whether they know about it or not. The reason is because G Fund assets in the Thrift Savings Plan (TSP) are used by the federal government to help meet expenses.

Also, the Civil Service Retirement and Disability Fund provides benefits to retired and disabled federal workers covered by the Civil Service Retirement System. This money is invested in special-issue Treasury bonds. The federal government also borrows money from this source to keep the government running.

Federal employees and retirees are always “made whole” after the debt ceiling has been raised or the debt ceiling is suspended.

The G Fund and the Debt Ceiling

The G Fund of the Thrift Savings Plan (TSP) invests in short-term Treasury securities that are issued to the TSP. As a result, the G Fund can be affected when the debt limit is reached. The principal and interest payments on these securities are still guaranteed by the Federal Government.

When it reaches the debt limit, the Treasury looks for ways to manage its cash and borrowing to continue funding the government. One way it does this is by suspending investments of the G Fund.

U.S. law authorizes the Secretary of the Treasury to suspend issuing additional amounts of investments to the G-Fund if investments cannot be made without causing the debt limit to be exceeded. This happens with the debt limit is reached.

No doubt, this makes many G fund investors nervous. The G fund is the largest fund in the Thrift Savings Plan. When the Treasury Department takes this action, investments in the G fund are still protected, and G Fund earnings are guaranteed under the Thrift Savings Plan Investment Act of 1987. The G fund continues to accrue earnings and earnings are updated each business day. Loans and withdrawals are not affected.

When the “disinvestment” period ends, the G fund securities are reconstructed as if the suspension never happened. In other words, 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 before there is a government default. That makes some G fund investors uncomfortable although, in the long run, it has not made any difference in the value of the investment.

The TSP said in a statement today:

As of Tuesday, March 5, 2019, the U.S. Treasury was unable to fully invest the Government Securities Investment (G) Fund due to the statutory ceiling on the federal debt. However, G Fund investors remain fully protected and G Fund earnings are fully guaranteed by the federal government. This statutory guarantee has effectively protected G Fund investors many times over the past 30 years. G Fund account balances will continue to accrue earnings and will be updated each business day, and loans and withdrawals will be unaffected.

Why the G Fund is Different from Other TSP Funds

Here is where the G fund is different from the other TSP funds. The G fund is invested in interest-bearing Treasury securities that are 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 fund are short-term securities unavailable 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.

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.”

Summary

The underlying problem is that the federal government authorizes spending more money than it receives. It borrows money to make up the difference between revenue and expenditures. The amount of money that is being borrowed keeps going up, so the amount of interest being paid by the government keeps going up as well.

Congress does not like to cut federal spending and, therefore, cutting government expenses. While the amount of tax revenue is high, the amount of spending is higher than the revenue so debt continues to rise.

As long as this continues, we can expect an occasional suspension of investment in the G fund. We do not know when, if or how the federal government’s debt situation will ultimately be resolved.

© 2019 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

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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

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