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Geithner's threat to tap congressional retirement funds rings hollow

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Treasury Secretary Timothy Geithner

Susan Walsh/AP

Treasury Secretary Timothy Geithner notified members of Congress this week that, until they raise the federal debt limit, he would tap one of their retirement funds — known as the “G Fund”— to keep the government running.

The lawmakers need not fear for their golden years, however. The threat is hollow: Once the debt showdown is over, the Treasury will by law restore all contributions and earnings.

The G Fund is guaranteed to earn money for members of Congress and other federal employees. The $128 billion fund is an oft-overlooked perk of congressional service. It offers the return of long-term Treasury bonds, at no risk.

The average American taxpayer guarantees the G Fund but can’t buy a share.

“What possible justification could there be for establishing a special class of higher-paying U.S. Treasuries, available only to federal employees? On top of a too-generous pension plan? On top of a too-generous thrift plan? There is none,” said Jim MacDougald, president of The Free Enterprise Nation, a group of free market conservatives.

In addition to their congressional pensions, and Social Security payments, members of Congress qualify for the federal Thrift Savings Plan, which is similar to a private sector 401(k). The government match to the TSP is 5 percent, and costs are low because much of the program is administered by federal employees.

Yet the truly unique feature of the TSP is the Government Securities Investment Fund—or G Fund—which offers, as the U.S. government puts it, “the opportunity to earn rates of interest similar to those of long-term Government securities but without any risk of loss.”

The G Fund is invested in non-marketable short-term US Treasury securities “specially issued” to the TSP, the government notes. “Payment of principal and interest is guaranteed by the U.S. Government.”

The interest earned by the G Fund is set by a formula approved by Congress and “results in a long-term rate being earned on short-term securities,” the government says.

Stock funds can offer higher rates of return, but carry risk and can suffer losses. The G Fund is a sure thing. It has an annual growth rate, since its inception in 1987, of 5.9 percent.

The risk-free guaranteed earnings makes the G Fund the most popular choice when members of Congress and other federal employees choose from the menu of investment funds offered by the TSP. Members of Congress, federal employees and US military personnel can invest in the Fund. There are more than 3 million active participants who qualify.

A study by the Federal Retirement Thrift Investment Board, which oversees the TSP, found that participants in the plan sought the shelter of the G Fund’s guaranteed return during the recent financial crash. As the stock market recovers, the TSP investors have been shifting their money back into equities. But more than 40 percent of the TSP funds, the single biggest allocation, were still in the G Fund last year.

In the current fiscal climate, the federal pension system has emerged as a target for both Democrats and Republicans looking to cut costs. “Federal employees enjoy one of the most generous retirement plans in the country,” said Jim Kessler, vice president for policy at the Third Way, an association of moderates.

The Third Way analysts, and their conservative counterparts, have singled out the federal defined benefit pension plan — the Federal Employment Retirement System — for scrutiny, especially its generous employer match.

“For every one dollar that is contributed into FERS by the employee, $14 is contributed by the employer, the taxpayer,” noted Kessler and a co-author, David Kendall, in a recent Third Way analysis. “If employers and employees contributed equally to the fund, as is often the case in the private sector, taxpayers would save $114 billion over 10 years.”

Republican Sens. Richard Burr of North Carolina and Tom Coburn of Oklahoma have introduced legislation that would abolish the defined benefit pension plan for new members of Congress and federal employees, starting in 2013. “The congressional pension plan currently in place only serves to foster political careerism and should have been frozen years ago,” said Coburn.

But both Democratic and Republican critics of the federal pension plan leave the TSP, and the G Fund, untouched.

This week’s events show another benefit, for official Washington, of the G Fund. It is one of two pots of money that a Treasury secretary can tap to keep the government running when it bumps against the ceiling of the legal debt limit. The other is the Civil Service Retirement and Disability Fund.

“The statute governing G Fund investments expressly authorizes the Secretary of the Treasury to suspend investment of the G Fund to avoid breaching the statutory debt limit,” Geithner told Congress on Monday. He urged the lawmakers to raise the debt limit, or risk “catastrophic economic consequences.”

But, Geithner assured them, “by law, the DSRDF and G Funds will be made whole once the debt limit is increased.”

The G Fund and CSRDF were tapped in previous showdowns in 1996, 2002, 2003, 2004 and 2006. In every case the federal employees’ investments were protected, and they were made whole when the impasse came to an end.