Private Accounts – Only Good For The Feds?
By Charles Cole (03/17/05)
The battle lines have been drawn on Social Security reform. The President is fighting for the establishment of a personal ownership component to the Social Security system. The Democrats are adamant in their opposition to the “privatization of Social Security” in the form of the creation of “private accounts” as part of the retirement system.
Democrat leaders in Congress now say that they will be glad to sit down with the Republicans and work out meaningful Social Security reforms, but only after the matter of private accounts is taken off the table. A press release by the Minority Leader in the House, Rep. Pelosi (D-CA) stated emphatically that “… private accounts will never provide retirement benefits that are equal to what Social Security provides workers today”, calling such private accounts a “false promise” by the Bush Administration.
How interesting! As a retired federal employee, I happen to know a little about the fed retirement system. Everyone who joined the federal workforce after 1986, including most current members of the House of Representatives and many in the Senate, is covered under a system known as the Federal Employee Retirement System (FERS). This retirement system is comprised of three components: (1) a “basic benefit” plan; (2) a Social Security component; and (3) the Thrift Savings Plan (TSP). The first two are traditional annuity programs which involve employee contributions and, in the case of Social Security, contributions made by the employer – in this case the government (with taxpayer funds).
The key component which Ms. Pelosi, Sen. Reid and their minions are desperate to avoid discussing is the TSP. Here’s why. When a person is hired by the government, a TSP account is set up in that employee’s name. On each federal pay day, the government automatically contributes 1% of the employee’s basic pay into his/her TSP. Employees may, voluntarily, opt to have an amount deducted from their pre-tax gross pay each pay period of up to 15%. Moreover, the government matches the first 3% dollar for dollar, and the next 2% at 50% of the employee contribution.
Now, here’s the dirty little secret. These accounts belong to the employee! Yes, they are private accounts! Employees manage virtually all the features of their accounts, including choosing among five investment funds: (1) a government securities investment (G) fund; (2) a fixed income investment (F) fund; (3) a common stock index investment (C) fund; (4) a small capitalization stock index investment (S) fund; and (5) an international stock index investment (I) fund. The employee chooses which of the above funds s/he wishes to include in his/her TSP, including the relative amounts of each. For example, one might opt to have 100% of all contributions (employee and government matching) in one fund, or any combination among any or all of the five funds to total 100% of the contributions.
It gets better! Employees may borrow against their TSP account’s principal amount, take the TSP with them should they leave federal service (making it a completely portable variation of a 401k account), and even designate beneficiaries for the account balance. In short, all the features the President is advocating for taxpayers, i.e. the people in our society whose taxes fund the entire FERS system!
To put dollar amounts to this TSP discussion, let’s see what a member of Congress might do with his/her private account. Assume a representative now earns $156,000 per annum and opts to contribute the maximum allowable (15%). The annual contributions into his/her TSP account would be $31,200, calculated as follows:
Employee contribution: $23,400 (via pre-tax deductions from basic pay)
Government contribution: $7,800 (government “matching funds”, paid for with taxpayer dollars)
Since employee contributions are made from pre-tax payroll deductions, this also reduces the taxable income by that amount (in the example above, by $23,400). Not bad.
Ms. Pelosi’s press release lambastes the President’s approach, claiming it would put the people’s retirement benefits “at the mercy of the stock market”. If private accounts in the President’s plan provide taxpayers the same ability to manage their individual accounts as is given all federal employees, then they could choose to participate in the same or similar stock index accounts as with the federal TSP. Democrats have gone out of their way to claim that they are protecting retirees’ benefits from “wall street”. But, aside from the obvious fact that their own private TSP accounts include stock and bond funds, the TSP system is managed by a Federal Retirement Thrift Investment Board, all of whose current members have investment backgrounds. That means that all of them have “wall street” experience!
Finally, the TSP rules clearly state that “money in the TSP and earnings on that money cannot be used for any purpose other than providing benefits to participants and their beneficiaries and paying TSP administrative expenses”. Well, what do you know? Turns out there IS a “lockbox” for retirement accounts. The delicious irony is that it only contains money set aside for federal workers, including, of all people, the Congress! Would that they had protected the Social Security Trust Fund with equal vigor over the decades during which they borrowed against that fund to provide pork barrel spending in support of their own political careers!
I would refer anyone who doubts any of the above to two websites, both of which cover in detail the FERS retirement system and its components: www.opm.gov (under the link marked “retirement”), and the website of the Thrift Savings Plan – www.tsp.gov. I predict that once people study this system, they’ll discover that once again it turns out that what’s good for the federal goose seems a tad better than for the taxpayer gander!
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