Everyone should have access to the federal Thrift Savings Plan, but not for you reason you think

Shortly before his humiliation and expulsion from public life, Florida Senator Marco Rubio resurrected the idea of allowing some non-government employees to invest in the Thrift Savings Plan, which is the federal equivalent of private-sector 401(k) and non-profit 403(b) plans. The proposal got some sympathetic attention from lazy personal finance journalists, and some critical responses from bloggers serving the federal workforce.

The lazy reason to support TSP-for-all: lower costs

The narrow reason financial journalists latch onto in support of TSP-for-all is administrative costs, and it’s true that TSP charges less in overhead and fund management fees than virtually all private retirement schemes, between 0.032% and 0.033%, depending on the fund.

Let me be clear: costs matter, and that’s a lower cost than, for example, a Vanguard mutual fund held in a Vanguard 401(k).

But, as opponents of TSP-for-all are quick to point out, those costs are subsidized in part by fees paid by employing agencies. Universal enrollment in TSP might provide some economies of scale, but would also introduce a large number of non-subsidized workers into the system, dragging up average costs even if the final cost is lower than most workers pay today.

For that reason many TSP-for-all proposals involve replicating a second pseudo-TSP for non-federal-employees, so federal employees continue to enjoy their agency subsidies and lower costs, while non-federal-employees are shunted into a parallel system with higher, unsubsidized costs.

With costs as low as they already are in the private mutual fund industry, this strikes me as the least convincing argument for TSP-for-all.

A decent reason to support TSP-for-all: simplicity and universality

An argument for TSP-for-all that I’m more sympathetic to is that decisions over the availability of tax-advantaged retirement savings shouldn’t be made by employers at all. If the federal government decides it’s willing to let people shield $25,000 in earnings from income tax in 2019 ($6,000 in IRA contributions and $19,000 in workplace contributions, plus catchup contributions in both), why should your boss get to decide whether you are able to take advantage of that benefit or not? It’s as nuts as companies running their own private health insurance offices.

Providing everyone, with or without their employer’s permission, with access to the total retirement savings benefit they’re entitled to, is a commonsense measure, although as I’ve said in the past, my preference would be to simply eliminate workplace retirement savings plans entirely and increase and universalize the contribution limits for individual retirement accounts (which isn’t mutually exclusive with TSP-for-all).

TSP-for-all is also sometimes praised on the grounds of simplicity, and here the argument is fair enough as far as it goes. It’s somewhat shocking even to me, but the “best retirement plan in the country” has just 5 investment options (plus “Lifecycle” funds that blend the 5 in different proportions): US large-cap, US small-cap, US bonds, international developed stocks, and the TSP’s proprietary “G fund.”

The first four are fairly standard low-cost market-capitalization-weighted index funds, while the G fund is unique in that it offers interest income based on intermediate-term US treasury rates, but with the principle guaranteed so that the fund can’t lose money when interest rates rise. A neat trick!

I think between them these are excellent components in a retirement savings portfolio, and wouldn’t have any serious objection if they were the only options available in a TSP-for-all plan. But there are perfectly reasonable objections to this fund lineup as well: emerging markets are completely absent, as are international bonds. Do those asset classes have a role in every portfolio? Of course not. Should they be categorically excluded from investments? That depends on the trade-off you want to make between simplicity, versatility, and diversification.

The best reason to support TSP-for-all: a simple national supplemental annuity

The primary source of retirement income for Americans is not traditional defined-benefit pensions, and it’s not defined-contribution retirement plans like 401(k)’s and 403(b)’s. It’s Social Security’s old-age benefit, a federal program that guarantees retirement income based on your recorded earnings paid into the program during your working lifetime.

One problem with our current jerry-rigged retirement system is that under our laws, annuities are not investments at all: they’re insurance contracts, sold on a commissioned basis by state-licensed agents and state-regulated for-profit companies.

If, instead, we want voluntary savings to accumulate and supplement workers’ Social Security income in retirement, then there’s no better solution than a federally-guaranteed annuity, available nationwide, based on a worker’s balance in the federal Thrift Savings Plan.

The Thrift Savings Plan already offers a free calculator showing how your retirement savings can be converted into a single lifetime, joint lifetime, or inflation-indexed annuity (and even a few more exotic options related to non-spouse beneficiaries), and I haven’t been able to find another company offering better terms. However, those annuities are still technically issued by the private MetLife corporation, and subject to state law (and bankruptcy court).

But since the federal government already runs a guaranteed income program for retirees, the greatest promise of TSP-for-all is the ability to convert accumulated savings into a supplemental Social Security benefit, guaranteed by the federal government to last as long as you do.

What do we want from our retirement system?

Nothing could be simpler than our retirement system as it exists today: the rich do what they can, while the poor suffer what they must. But this rule is not written in the stars, it’s the product of very specific decisions made in the development of our retirement policy:

• Employers are allowed to decide the retirement savings options available to their employees, so low-wage employees have less access to tax-advantaged savings vehicles than high-wage employees;
• Social Security contributions are capped so high-income workers have more disposable income to contribute to tax-advantaged plans than low-income workers do;
• Low-income workers who are able to save in individual retirement accounts can be lied to by financial advisors who are not required to act in their best interests.

A simple, cheap, universal, federal Thrift Savings Plan won’t solve every problem in the world. But no one defending the current system is even pretending that it’s doing an adequate job providing for income security in retirement.

So how about we try something different?