A common argument for hiving off part of one’s Social Security taxes into a private account is the federal employee Thrift Savings Plan (TSP) – a 401(k) type savings plan. Now that the TSP is 30 years old, the savings data is troubling, and, frankly, makes a poor argument for private accounts.
The TSP was created to replace the ‘defined benefits’ retirement system with a ‘defined contribution’ scheme. Federal employees make contributions into personal accounts and receive a five percent match from the government.
Employees have a choice of various index funds, and the TSP itself has a very low administrative fee. For example, the popular stock index fund has a total fee of .047 percent.
According to the TSP, there are about 47,000 people who have been in system since its start in 1987.
Here’s the troubling part: the average account balance for those 47,000 people is $346,000.
If, at retirement, a person withdrew just $30,000 for their income, their nest egg of $346,000 would last them about eleven years. The retiree also would receive Social Security benefits plus a small federal annuity benefit – let’s say that bumps the retiree up to about $35,000 a year. It’s still not much.
And remember, the $346,000 figure is the average: thus, half of our 47,000 population has saved less than that, and would have a smaller income in retirement than our ‘average’ retiree.
Another factor to consider is how the average federal employee is not the average American. Federal employees are more likely to have some college education even if they’re employed in clerical jobs. Professional jobs (non-clerical) almost always require a college degree.
So we have a population that’s better educated than the average American but only managed to garner TSP savings that will not provide much of an income in retirement.
Why is this so? Clearly, some employees have never maxed out on their contributions (and, therefore, failed to receive their full matching funds from the government).
These employees were not neglectful or stupid. They often have other pressing family obligations, and need full access to their entire paycheck.
Others may have been too conservative in their investment choices. If someone is risk-averse, they’ll opt for the super-safe government bond fund. The downside is the fund’s yields are very low. The major benefit for the risk-adverse is the five percent employer match – otherwise their compound interest rate would hover around zero.
Some might say the answer is working for another five to ten years. Setting aside factors such as the employee’s health and family situation (e.g., being a caregiver for a very elderly parent), having the average federal employee lengthen his/her tenure blocks younger cohorts from entering the system. This leads to succession planning issues: who will step in if there’s a large pool of retirement-ready employees? And what about younger veterans who are seeking federal employment?
Further, the current Social Security retirement system is weighted to pay out more to lower-income workers, as a way to keep them out of poverty. I have yet to hear from anyone supporting private accounts as to how the Social Security retirement system could continue this important civil society mission if workers’ payments were diverted to private accounts.
Finally, if we assume the average American worker to be less educated than our 47,000 employee population, is it realistic to expect ordinary workers to make wise investment choices? The TSP thirty-year track record is not good. The evidence indicates that the investment choices of many of those better-educated 47,000 people were mediocre to poor.
Last year, candidate Donald Trump promised not to change Social Security. Some Republicans in the House, notably Speaker Paul Ryan, disagree; they want a TSP-like system for their private account plan. President Trump now has 30 years of data to prove how private accounts are a lousy idea. Millions of seniors and almost-seniors are counting on him to keep his promise.
The President would be wise to do so. It was an important factor in his primary wins. And looking towards 2020, it would cement a core voting bloc composed of Republicans, Democrats and Independents. It’s a matter of trust, Mr. President.