Debt limit's impact on your Thrift Savings Plan

Monday - 3/14/2011, 4:58pm EDT

Tom Trabucco, director of external affairs, Federal Retirement Thrift Investment Board

Click to hear the interview.

Download mp3

The government could reach its debt limit of $14.3 trillion as soon as next month. If Congress does not raise the debt ceiling, what happens to your Thrift Savings Plan G Fund, which is backed by government debt securities?

During a debt limit suspension period, the Treasury Department cannot issue new G Fund securities. But even in this suspension period, TSP investors don't have to worry about their G Fund, said Tom Trabucco, director of external affairs for the Federal Retirement Thrift Investment Board, which oversees your TSP, in an interview with the DorobekINSIDER.

Congress passed legislation in 1987 that ensured the government would repay any investments into the G Fund when a debt limit suspension period is over.

In other words, Trabucco said, "After the period is over, the G Fund is made whole."

The TSP Board continues to perform its normal activities during a suspension, Trabucco said.

In a "political showdown" such as the current one, federal employees may hear rumors about what will happen to their retirement investments, Trabucco said.

"There is no need to be anxious, however, in this situation with the permanent law protecting investors, guaranteeing they will get the earnings to which they are entitled," he said.

Trabucco said it would be "travesty" for people to take funds out of the G Fund for fear of a debt limit suspension.

The G Fund protection extends to funds that include a "slice" of the G Fund, such as the L Funds, Trabucco added.

A 1996 analysis by the Congressional Research Service explains how the law works:

The "G" fund matures and is reinvested daily. During a debt-issuance suspension period, rather than reinvesting the full balance of the "G" fund, the Secretary can credit some or all of the balance of the fund to non-interest-bearing accounts in the Treasury. These non-interest-bearing accounts do not count against the public debt limit. The law requires the Secretary to move these funds back into interest-bearing Treasury securities as soon as the securities can be issued without exceeding the public debt limit. The accounts of the "G" fund must also at that time be credited with the interest that would have been credited during the debt-issuance suspension period. Consequently, no one who has invested TSP contributions in the "G" fundcan suffer any reduction in assets or loss of interest income as a result of the actions taken bythe Secretary of the Treasury under the authority of section 8438 of title 5.

RELATED LINKS

GAO: Analysis of Actions During the 1995-96 Crisis

Congressional Research Service memo on public debt limit and feds' retirement funds