I bet a lot of people in the public service arena are staying the course during these times when the jab is front and center are doing so because of their pension plan. For this reason as well as others, we felt it time to spill the beans on this so-called public service pension funds (FERS, TIPS, etc.). A Little History Public pensions got their start with various promises, informal and legislated, made to veterans of the Revolutionary War and, more extensively, the Civil War. They were expanded greatly, and began to be offered by a number of state and local governments during the early Progressive Era in the late nineteenth century. Public sector retirement plans for state and local government employees date back over a century to the late 1800s. These plans were developed by government employers to provide retirement benefits for employees who were in public service. In many cases the plans were offered to make public employment competitive with employment in the private sector, which often paid higher wages. The reasoning was that although an employee earned less money working for a government, their retirement benefits were guaranteed. This guarantee protected employees and family members throughout their retirement years. The first law creating retirement benefits for public employees was passed in New York State in 1857, which provided a lump sum payment to New York City police officers injured in the line of duty. In 1878, the plan was revised to provide a lifetime pension for police officers at age 55 after completing 21 years of service. This same coverage was afforded New York City’s firefighters in 1866. The earliest municipal plan for teachers was established in New York’s borough of Manhattan in 1894. Six state teacher retirement systems date back to the beginning of the twentieth century: North Dakota and California established plans in 1913, followed by Massachusetts in 1914, Connecticut and Pennsylvania in 1917 and New Jersey in 1919. The first state employee retirement system for general service employees was established by Massachusetts in 1911. By 1930, 12% of the larger state-administered pension systems currently in existence had been established.2After 1935, the number of public plans grew rapidly. The Social Security Act, which passed in 1935, excluded state and local government employees, due to concerns over constitutional issues related to the federal taxation of states and their political subdivisions. To provide retirement protection for their workers, many state and local  U.S. Congress, Task Force Report, p. 6. To provide retirement protection for their workers, many state and local governments developed their own retirement plans. National Conference on Public Employee Retirement Systems governments developed their own retirement plans. Between 1935 and 1950, roughly half of the larger state and local government plans in the United States were established.3As originally designed, many earlier public retirement plans consisted of two parts: (1) a lifetime pension funded by the employer based on the employee’s salary and years of service at retirement, and (2) an annuity based on the value of accumulated employee contributions. For example, when it was established in 1920, the New York State Employees’ System promised a benefit of 1/140th (0.71%) of final compensation (averaged over the last 5 years of employment) times years of service, funded by the State. In addition, it provided an annuity, based on employee contributions, intended to roughly match the State-provided benefit. However, in order for employees hired at different ages to match the employer’s benefit at retirement, different employee age-based contributions rates were often required, complicating the system’s administration. Consequently, by the 1970s, most public sector plans had simplified their benefit designs to provide lifetime benefits based solely on age, service and salary at retirement. Although employee contributions were typically still required, they were generally set at a fixed rate and the retirement benefit did not depend on accumulated employee contributions. In addition to changes in benefit design, public sector plans have evolved in other ways. Perhaps one of the most significant changes that plans have made over the last three decades relates to investment policy. Before the 1980s, many plans restricted plan investments using “legal lists” specifying the portion of plan assets that could be invested in various securities. Often these legal lists restricted the percent of plan assets held in common stock to 35% or less.5 However, starting in the 1980s, many public plans began applying the “prudent person” rule to govern investments. This rule was codified in the Employee Retirement Income Security Act (ERISA) of 1974 and allowed assets to be invested in a wide range of securities, as long as the investments were prudent and diversified. Although ERISA does not apply to public sector plans, many governments incorporated the prudent person rule in their investment standards. As a result, the proportion of plan assets invested in equities grew rapidly, as did their investment earnings. Now Here is the Truth - Do You Even Own Your Retirement “Ownership” is a rather fuzzy concept where federal retirement accounts are concerned. However, there is perfect clarity in recognizing feds don’t enjoy the same custody rights within their retirement nest eggs as other retirement savers do. According to Merriam-Webster, to “own” means “to have power or mastery over.” But, do federal employees enjoy full “ownership” or “mastery” of their Thrift Savings Plan (TSP) assets? Consider they have no authority to prevent the Treasury secretary from exploiting their assets held in the G-Fund. Specifically, when it is “deemed necessary” to purpose this (congressionally granted) line of credit. Per the Federal Retirement Thrift Investment Board’s Director of External Affairs Kim Weaver, federal employees were maintaining nearly $219 billion (more than 45 percent of all TSP assets) in the TSP’s G fund as of Aug. 31, 2016. Nice job of “socking it away,” feds. But, are YOU the definitive “owners” of your retirement savings? Examine the definition of “ownership,” then ask yourself, who’s been swiping your (proverbial) TSP ATM card? Of course, the federal government guarantees it will pay back all money borrowed from the G-Fund. However, this is a subject of ownership, not promises. If an employer can acquire retirement funds from their employees without their consent, who really owns (or has mastery over) those retirement assets? This is an ambiguous subject, to say the least. Consider:

  1. This repayment guarantee comes from a borrower that is (at least) $19 trillion in debt and spends 17 percent more than they earn. (See

  2. This plan has been devised to allow the Treasury secretary to appropriate a loan without seeking the consent of the lender (federal employees).

  3. The confiscation of this source of funds creates a bypass of any real fiscal accountability. The G-Fund loans don’t “officially” increase the national debt. Subsequently, this allows the borrowers to circumvent their own, self-imposed, spending limits.

It should be noted that every time the government has borrowed from the G-Fund, it has always paid it back. However, (to pilfer a phrase from my industry) past performance is no indication of future results. The risk is real: one day the loan repayment may be delayed, postponed or even defaulted.

Whenever there is a “continuing resolution issue” or “debt ceiling crisis,” one of the Treasury secretary’s most accessible options is the G-Fund. My crystal ball says, “With more and more continuing resolution issues, debt ceiling crises, growing G-Fund balances and an insurmountable national debt … this particular loan program can expect a great deal more exploitation.” According to, the 2016 national receipts are estimated to be $2.99 trillion. The 2016 national outlays will be approximately $3.54 trillion. Leaving a 2016 annual deficit of $552 billion. These figures may help explain the ongoing allure, for government officials, to penetrate these vulnerable federal retirement accounts. When utilized, the question arises: Is this program’s purpose to shield and underwrite Washington’s out-of-control spending activities? Washington’s unrestrained spending flurry does appear to be a contributing transformative catalyst. One that may have influenced the conversion of the TSP (G fund) from an autonomous “personal” retirement asset, (contributed by and for federal employees) to a proverbial government “trust fund.”

Important issues often misunderstood about the G-Fund:

  1. There are no guarantees that address any inflation-fighting aspect (it offers a stated goal but not a guarantee). It is entirely possible (perhaps even likely) to place money in the G-Fund that will lose buying power over time. More on this in a moment.

  2. A large percentage of a federal employee’s retirement assets placed into the G-Fund may not be an appropriate fit for them. For employees that need true “inflation-fighting” growth, the G-Fund may even be counterproductive as an investment choice.

  3. The G-Fund is the only index fund available in the TSP not managed by an outside manager. It is managed by the FRTIB, a federal department that is part of the executive branch. The other index funds are managed by Blackrock, a well-respected Wall Street player.

  4. The G-Fund is the only index fund in the TSP, currently subject to this loan program.

Concerning the aggressive patronage of the G-Fund by federal employees, some speculate that feds have fallen victim to oblivious passivity. If that is true, feds are likely prone to remain unwitting investors in the G-Fund loan program. They may be subject to utilizing the G-Fund in amounts and at times that are inappropriate for their needs. Why? Because they don’t know what they don’t know, and they fear making “the wrong choice.” This creates a potential paradox for many feds. This oblivious passivity may well lead to feds placing (or leaving) large amounts in the G-Fund. Unfortunately, this could be the exact “wrong choice” they were attempting to avoid in the first place.

Even with this knowledge, it is understandable why feds continue to place so much of their hard-earned savings in the G-Fund. Frankly, it is fear and the desire to create “no-risk” security for their retirement savings. Where market risk is concerned, the G-Fund is one of, if not the least volatile investment options available. There are, however, other risks to consider, such as inflation risk. Inflation risk is the risk an investment exposes the investor to — of not likely being able to offset the losses experienced through inflation (i.e. a dollar doesn’t go as far as it used to). Inflation is the largest contributor to that fact. Investments that offer low-inflation risk are expected to potentially provide gains that will outpace future inflation rates. The G-Fund is not typically looked at as one of these types of investments. Many of the (federal employee) lenders are convinced that if they put money into the G-Fund line of credit, the borrower will guarantee the G-Fund values will not drop. They believe the G-Fund is guaranteed to only go up (not down) in dollar amounts. Sorry to say, but this simply isn’t true. The G-Fund has no such guarantees. Many of us understand that “control is (often) an illusion.” But, in reference to retirement savings, feds deserve better than control/ownership ambiguity. It is unconscionable that their retirement accounts are subject to government confiscations. Their retirement savings should incontrovertibly belong to them alone, just as similar retirement accounts belong to other Americans. Possible compromise: If national leadership would like to continue to feed their poor spending habits by borrowing federal employees’ retirement money, feds should have a right to turn down their loan request … barring that, the ability to negotiate mutually acceptable terms! Conditions of the Government Who Is Guarantee Over the Funds BANKRUPT!!!!

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