Role Model?

The Social Security debate shines a spotlight on the Thrift Savings Plan.

More than 3 million federal workers have about $150 billion invested in the Thrift Savings Plan. But until this winter, the 401(k)-style retirement savings program hadn't gotten much attention outside government circles. Then the TSP suddenly started making headlines when Republicans pointed to it as a model for Social Security reform that would include individual investment accounts into which workers could direct a portion of their payroll taxes.

President Bush even talked about the TSP during his State of the Union address in February. "Personal retirement accounts should be familiar to federal employees, because you already have something similar, called the Thrift Savings Plan, which lets workers deposit a portion of their paychecks into any of five different, broadly based investment funds," Bush said. "It's time to extend the same security and choice and ownership to young Americans."

Could the TSP be the model for fixing the so-called "crisis" in Social Security?

Probably not. Bush has mentioned the TSP numerous times in the context of creating private accounts. But the proposal he sketched out in the State of the Union address does not actually look much like the TSP. The only similarity is, like the TSP, the White House plan would give workers a handful of relatively conservative investment options. This is important because of investment risk.

Many Democrats and groups such as AARP, a powerful lobby for older Americans, have voiced opposition to a private-accounts system. Switching from a defined benefits program to an investment vehicle makes individuals vulnerable to risk, they say. In the current Social Security retirement system, seniors are entitled to an amount specified by law. In the TSP, federal workers may receive more money than they would have received through defined benefits, but they also could lose out.

"Federal employees invest under certain guidelines, and I don't hear them screaming it's risky," Bush said during a January briefing. The TSP funds have performed well since 2003, and 10-year annual compound returns range from 4.3 percent for the I Fund, which consists of international stocks, to 11 percent for the C Fund, made up of stocks from midsize to large U.S. companies.

Still, many federal employees remember losing money when the stock market tanked a few years ago. The C Fund suffered in 2000, 2001 and 2002 before rebounding in 2003. The S and I funds, which were introduced in May 2001, also had negative returns until 2003. The G and F, which are nonstock funds, performed fairly well during that period.

Critics of modeling Social Security reform on the TSP point out that the Thrift Plan was designed to complement Social Security, not replace it. The TSP was created in 1986 as part of the Federal Employees Retirement System, which replaced the Civil Service Retirement System. "It is often said that a comfortable retirement is based on a 'three-legged stool' of Social Security, pensions and savings," states the Social Security Administration's Web site.

In FERS, the TSP is one leg. Social Security and the Basic Benefit Plan are the other two. Replacing Social Security's defined benefits with an investment program would give federal employees two-legged stools. (Americans who don't have pensions could be left with only one form of retirement savings-individual investment accounts.)

Because of opposition to models that shift risks onto individuals, the White House plan includes built-in protections. The proposal outlined by the president in early February was a hybrid between defined benefits and individual investments that would maintain guaranteed benefits but give younger workers the option to invest a portion of their savings. It was not yet clear whether the White House plan would cut benefits to address the projected shortfall in the system. Other possible measures to limit risks include encouraging workers to move into more conservative funds as they near retirement and protecting low-income people from benefit cuts.

Talking about the TSP as a model for Social Security also is confusing, since the TSP was itself modeled on the private sector's 401(k) plans. "It underplays the fact that many Americans already have access to a Thrift Savings Plan-like system. That's the 401(k)," says Dan Adcock, assistant director of legislation at the National Association of Retired Federal Employees.

So why mention the TSP and not 401(k)s?

With more than 3 million investors, the TSP is the largest individual-account retirement system in the country and therefore proof that an efficient system at least that large is possible. The plan's administrative costs are very low-60 cents for every $1,000 in 2004. But whether the TSP model could expand successfully to more than 100 million workers, and who would administer the giant program, remains to be seen.

According to Francis Cavanaugh, Social Security individual accounts would be far more expensive to administer than the TSP. Cavanaugh, now an independent public finance consultant, was the first executive director of the Federal Retirement Thrift Investment Board, which administers the TSP. Self-employed workers and small companies couldn't offer the support that federal agencies give to the TSP free of charge, he argued in a 2002 report funded and published by AARP. This support, which includes record-keeping, distributing materials, investment education and counseling, processing investment transactions, and other services helps keep TSP's administrative costs low. Those costs would eat up far too much of low-income workers' savings, Cavanaugh wrote in the report, adding that such issues "would cause serious problems for Social Security."