If someone told you he borrowed money from an account you were using for future retirement income without your consent or your knowledge, most of us would be very upset. If your money was in a large financial institution, and that company advised you it was temporarily short of funds and needing to pay its expenses so it was borrowing from your investment accounts, lawsuits would proliferate and the company may end up going bankrupt when the public lost faith in the safety of their investments there.
But what if your money is invested in the Thrift Savings Plan’s G Fund? Can the government borrow this money or borrow against it to pay its bills? Does it make you feel any better if the money won’t be used for a long time and that it will be paid back, with interest, when the government gets more money?
I doubt there are circumstances where a private company could legally take actions like this. The federal government can take these actions though and does use the G Fund as a crutch when there is a short-term cash crunch.
Extraordinary Measures, G Fund, and Government Debt
The Treasury Department is now taking “extraordinary measures” in order to “prevent the United States from defaulting on its obligations as Congress deliberates on increasing the debt limit….”
These extraordinary measures may involve some of your money in the G Fund.
The extraordinary measures currently available are:
- Suspending sales of State and Local Government Series Treasury securities;
- Redeeming existing, and suspending new, investments of the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund;
- Suspending reinvestment of the Government Securities Investment Fund; and
- Suspending reinvestment of the Exchange Stabilization Fund.
According to the Congressional Budget Office (CBO):
Unless legislation is enacted to raise or suspend the debt limit, the Treasury must take extraordinary measures to continue funding government activities after August 1, 2021. Even then, such measures will be available only for a limited time.
Legislation to raise the debt limit was not passed by August 1, 2021.
The debt ceiling, which is currently about $22 trillion, is the limit on the amount of debt the federal government can borrow. It applies to both the $16.2 trillion held by the public, and the $5.9 trillion owed by the government. If the debt ceiling is not raised or suspended, the federal government can no longer issue debt. In effect, the government runs out of money as it cannot borrow more to pay expenses.
CBO estimates that unless the debt limit is increased, the Treasury, after using all available extraordinary measures, will probably be unable to make its usual payments starting sometime in the first quarter of the new fiscal year, most likely in October or November, although an earlier or later date is possible.
Why is this issue coming up now?
In 2019, former President Trump suspended the nation’s borrowing limit for two years. That suspension expired on July 31, 2021. Congress has not taken action to increase or suspend the debt ceiling. Therefore, the Treasury Department is now taking what it refers to as “extraordinary measures” so the government can continue to pay its obligations.
Will the Debt Ceiling be Raised?
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 a lot more money than it receives in revenue.
In the past, the debt ceiling has always been raised. In the current Congress, neither political party has a large majority. The Senate is split 50-50. The vice-president can cast a vote breaking a tie so this gives the Democrats an edge.
In the House of Representatives, there are now 220 Democrats and 212 Republicans. There is an advantage for Democrats but it is a very narrow advantage.
In the meantime, rancor between the parties is on full public display. Speaker of the House Nancy Pelosi recently referred to the Republican leader in the House as a “moron.” After that, Republican leader Kevin McCarthy stated, “It will be hard not to hit her (Nancy Pelosi) with it (a gavel) but I will bang it down” if he becomes Speaker after the elections in 2022.
No doubt, the public jabs are less vitriolic than what is being said in private.
Obviously, the parties are not working well together in Congress. This may mean a delay and considerable difficulty in passing an increase in the debt ceiling.
While they may not know it, many federal employees are contributing to financing the federal government’s operation. As noted above, this is because G Fund assets in the TSP are being 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.
The good news in this Congressional ritual is that federal employees and retirees are always “made whole” after the debt ceiling has been raised or the debt ceiling is suspended.
Making G Fund Investors Nervous
No doubt, this situation makes many G fund investors nervous. The G fund is one of the largest funds in the TSP. 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 from the G Fund 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 debt 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 on previous occasions when this was done.