Senator Marco Rubio recently announced his plan to revamp how Americans save for retirement. Along with the conventional (yet important) ideas of raising the retirement age and eliminating the Social Security earnings test, Rubio’s plan contains an unorthodox element: He wants to open the Thrift Savings Plan (TSP) to the 75 million workers who do not have an employer-sponsored plan. The TSP is a 401(k)-type retirement account administered by the federal government exclusively for federal employees. It’s been held up as a model for how a defined-contribution plan should be run: miniscule administrative costs supporting a diverse selection of individual and life-cycle funds.
Should more Americans participate in the TSP? That depends on just how large the TSP would become. If tens of millions of Americans sign up, the federal government would be in charge of administering a large portion of the nation’s savings. One need not be a tinfoil hat-wearer to wonder if politics will creep into the investment options that are offered. In this age of people losing their livelihoods over their political beliefs, I can imagine a situation in which the federal government is urged to “divest” from companies led by people who, say, oppose same-sex marriage. Given the amount of money the government would oversee, that pressure could be a backdoor way for the government to regulate business practices and even political speech.
It’s not an unfounded fear. Many public pensions at the state and local level have already divested or frozen their gun and tobacco holdings due to political pressure. When now-mayor Bill de Blasio was New York City’s public advocate, he drew up a list of what he called the “dirty dozen” investment firms with gun holdings, stating that, “Elected leaders understand that this [divestment] is a tool of government with huge ramifications.” And now activists even want public pensions to divest from fossil fuels!
Unlike some of the large public pension funds with in-house active portfolio management, the TSP offers index funds maintained by a private firm. So the situation is a bit different: Politicians generally don’t feel a “fiduciary responsibility” to divest when the money is held in defined-contribution accounts rather than a single defined-benefit fund. Nevertheless, whether the TSP’s structure would provide enough insulation from politics is an open question.
Another concern is that the most popular fund in the TSP — the “G fund” — carries an implicit government subsidy. It holds special non-marketable securities, issued exclusively to the TSP by the Treasury, that have the low volatility of short-term bonds but the higher interest rate of longer-term bonds. Back when Andrew Biggs and I were comparing federal and private-sector compensation, we calculated that the implicit subsidy was worth a 2 percent raise for federal employees, or around $2.3 billion annually. Would every participating American be entitled to this same subsidy? That could mean a 10- or 20-fold increase in its cost.
More generally, would the returns on all of the TSP funds carry a de facto guarantee? Like every defined-contribution plan, the TSP’s investment risk is supposed to rest solely with participants. But if the TSP is the nation’s government-run 401(k), an economic downturn might lead to political pressure for a bailout when returns are lower than expected. Would politicians be able to resist? These are the kinds of questions that Rubio will have to answer.