Thrift Savings Plan may be model for Social Security reform

President Bush is expected to emphasize Social Security reform in his State of the Union address Wednesday night. To explain his vision, Bush may point to a program already familiar to millions of federal employees: the Thrift Savings Plan.

Bush has suggested that the TSP could serve as a model for private accounts into which workers could direct a portion of their Social Security payroll taxes. The president has not yet laid out all the details of a proposal, but he and other top Republicans have promoted a plan that, like the TSP, would give workers a handful of relatively conservative investment options.

Many Democrats and groups such as AARP, a powerful lobby for older Americans, are fighting the private-accounts proposal. For example, they say switching from a defined benefits program to an investment vehicle makes individuals vulnerable to risk. In the current Social Security retirement system, seniors are entitled to an amount of benefits specified by law. They might receive more money through an investment plan like TSP, but it's also possible they could get less.

"Federal employees invest under certain guidelines, and I don't hear them screaming it's risky," Bush said during a January briefing. 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. The plan's administrative costs are very low-60 cents for every $1,000 in 2004. The San Francisco firm Barclays Global Investors manages the five funds.

Still, many federal employees remember losing money when the stock market dropped steeply just 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, had negative returns until 2003. The G and F funds, which are nonstock funds, performed fairly well during that period.

The White House may consider measures that would limit investment risks, such as encouraging older workers to move into more conservative funds as they near retirement, and protecting low-income people from benefit cuts, according to a report in The Washington Post.

Critics of the plan point out that the TSP 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-which provides a defined benefit based on an employee's pay level and length of service-are the other two. Replacing Social Security-defined benefits with an investment program would give federal employees two-legged stools. (Americans who don't have pensions would be left with only one leg on their stool of retirement savings-individual investment accounts.)

Talking about the Thrift Savings Plan as a model for Social Security is also a bit 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)," said Dan Adcock, legislative director at the National Association of Retired Federal Employees.

With more than 3 million investors, the TSP is the largest individual-account retirement system in the country, and some say that's proof that an efficient system at least that large is possible. But whether the TSP model could expand successfully to more than 100 million workers remains to be seen.

Francis Cavanaugh doesn't think it's feasible. Cavanaugh 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, distribution of materials, investment education and counseling, processing investment transactions and other services, helps keep TSP's administrative costs low. Cavanaugh argues that there are too many self-employed people and small businesses to simply pass these administrative costs to private employers.

So such costs, which he projects at $46 billion a year, would either eat up a large portion of low-income workers' savings or become a huge expense to government. That "would cause serious problems for Social Security," Cavanaugh wrote in the 2002 report.