Welcome to TSP Strategies

Welcome to TSPstrategies.com! This Web site is dedicated to exploring the benefits of saving and investing in the Thrift Savings Plan.

The companion book, TSP Investing Strategies: Building Wealth While Working for Uncle Sam, lays out a simple set of strategies for long-term, buy-and-hold investors to consider while investing in the TSP. This Web site and accompanying blog will build on those concepts, while focusing on new investing options and developments related to the TSP.

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‘Tick Tock Tick Tock That’s the Sound of Baby’s Clock…’

My young son loves to be read “Baby Listens,” written by Esther Wilkin in 1960.  It’s a “Little Golden Book Classic” edition now.  It’s very lyrical.

The first main page of the story shows a baby entranced by an old alarm clock.  “Tick tock tick tock, that’s the sound of baby’s clock…” goes the book.

That’s what immediately came to mind when I read the annual Board of Trustees’ Report on Social Security and Medicare, and the CBO’s latest long-term budget outlook, both published last month.

Tick tock.  Tick tock.

The reports aren’t lyrical at all, but they definitely feature the ticking sound of a clock in the background.

In a nutshell: Social Security’s Disability Insurance trust fund will run out at the end of 2016 (as noted previously here); Social Security’s main trust fund will be depleted sometime between 2030 and 2033 (the reports differ slightly on exactly when); and Medicare’s Hospital Insurance fund will be depleted around the same time, in 2030.

To be sure, in what is essentially a pay-as-you-go system, after the trust funds for Social Security and Medicare run dry taxes from workers can provide about 75% of promised benefits from that point on.  But the urgent message of both reports is that to make up the difference, we can make small changes now (not least of which is to enact stable policies that promote stronger economic growth), or else risk having to tax our future generations upwards of 40% more to pay for benefits we promised ourselves in past decades.

Here’s the relevant statement from the Trustees’ report: “Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable earnings will grow rapidly from 11.3 percent in 2007…to roughly 17.1 percent in 2037, and will then decline slightly before slowly increasing [again] after 2050.”

A jump from 11.3% to 17.1% is a 50% increase in taxes.  Already FICA taxes (which includes Social Security, Medicare, etc etc) are currently 15.3% – 7.65% from our individual paychecks, and another 7.65% from our employer.  Congress and the White House conveniently spent the surplus over the years, giving IOUs to Social Security that now need to be redeemed, paid for by taxpayers.

Using FERS as an example, lawmakers already appear very reticent to raise contribution rates equitably, instead opting only to raise rates (or taxes) on future generations – in the case of FERS workers, those who began government service this year and in future years are now required to pay 4.4% of their salary toward their retirement, compared to 0.8% for longer-serving feds.  Had all FERS workers been included – we all receive the same pension benefits, after all – that amount could’ve been kept below 2%, equitably.  (Of course there are voices out there who want to wily-nily raise contribution rates significantly more, but that’s a different discussion.)

My point for TSP participants is that 1) we have massive deficits in Social Security et al, 2) Congress and the White House have habitually delayed taking any concerted action to deal with these massive deficits, and 3) when they have “compromised” on dealing with deficits, future generations are disproportionately impacted by the “compromise,” which is often based on political expedience.  And sometimes there are unintended consequences to sticking it to later generations (“who is John Galt?” becomes “who is Jane Fed?”)

So for TSP participants, be careful about calculating so-called Social Security benefits into your future income projections.  2030 is only 16 years away, and the problem of massive unfunded deficits certainly hasn’t been solved yet nor is it close to being solved.

That’s precisely why I used the term “Building Wealth” in the title, TSP Investing Strategies: Building Wealth While Working for Uncle Sam.  This isn’t about getting rich.  This is about having the means and resources to weather possible future fiscal problems in Social Security, pensions, and potential changes to calculating cost-of-living adjustments.  If you have your own sources of personal wealth – built up over time in the TSP, in IRAs, in your ultimately paid-off home – you can sleep soundly at night, and not worry about surviving on taxes taken from the incomes of your and my children and your and my children’s children.

Ironically, the next page in “Baby Listens” is “gurgle gurgle glub glub, water’s going from baby’s tub…” That neatly sums up the increasing burdens on my son’s future income potential, in order to support currently unsustainable rates of payouts for Social Security, Medicare, et cetera, et cetera…

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