Hit the Ceiling

Federal employees sometimes view their pay as expendable when stacked against other pressing needs, such as reducing the deficit and funding the government. But even in a tough economy and during a government spending spree, federal employees can feel secure about their retirement nest egg.

In recent weeks, federal spending has inched closer to the debt ceiling, the legal limit on how much debt the Treasury Department can issue. That ceiling was created by the 1917 Second Liberty Bond Act, and requires Congress to vote to set a new ceiling and allow further government spending. In February, when the American Recovery and Reinvestment Act took effect, the debt ceiling rose to $12.1 trillion. But federal debt hit $11.8 trillion at the end of August, and health care reform could demand substantial spending increases in coming years. And so the perpetual congressional debate over raising the debt ceiling is likely to start up again.

But Congress isn't the only body concerned when government spending approaches the debt limit. Federal employees often worry that Uncle Sam will use the Thrift Savings Plan's government securities, or G Fund, as a kind of emergency piggy bank to maintain spending levels and dip into at will. Any threat to the G Fund would be particularly serious in a difficult economy because it is the Thrift Savings Plan's most stable fund -- and the one in which many employees have parked their investments during the past year's market turmoil.

While the G Fund isn't sacrosanct, federal employees aren't in danger of becoming the government's creditors on any permanent basis. It's true that when federal spending nears the debt ceiling, Treasury can stop issuing more securities to the G Fund if making those investments will push federal debt over the limit. During the1995 budget crisis and government shutdown, then-Treasury Secretary Robert Rubin did precisely that. Treasury Secretary John Snow did the same thing in early 2006.

But according to the 1987 Thrift Savings Fund Investment Act, suspending investments in the G Fund only can be a temporary solution for Treasury. If the Treasury secretary takes that step, as soon as Congress raises the debt ceiling, the department must begin investing again in the G Fund and pay any interest accrued to the fund during that time but not added to the fund's balance. So even though the prospect of the government leaning on the G Fund to rein in its debt could be frightening for federal employees, the law guarantees that their retirement fund is first in line for repayment. President Clinton vetoed attempts by congressional Republicans in the mid-1990s to eliminate the requirement that federal employees be repaid with interest.

So while federal employees might not enjoy having their retirement funds frozen when spending skyrockets, at least their discomfort comes with a legal guarantee that it's temporary. That's more than most private investment firms can offer.