NARFE: Raise Debt Limit, Hands Off CSRDF/Treasury Turns To Fund to Keep From Default
By Dan Adcock
Legislative Director
June 2011

NARFE President Joseph A. Beaudoin called on President Obama and Congress in May to enact a new statutory debt limit instead of “borrowing” billions of dollars from the Civil Service Retirement and Disability Fund (CSRDF) and the Thrift Savings Plan (TSP) G Fund to avoid a government default.

At press time, the federal debt was expected to reach the statutory limit of $14.3 trillion by May 16. If the limit is reached, Treasury Department officials will have to resort to extraordinary money management mechanisms (including accessing federal trust fund assets) to keep operations running.

“The Treasury Department is preparing to borrow our retirement funds because some lawmakers want to use the debt ceiling increase as leverage in the battle over the budget. Or even worse, some have irresponsibly downplayed the economic crisis that would result if a government default were allowed to happen,” Beaudoin said. “Borrowing our earned economic security should be an act of last resort to avoid default, not the first. We urge Congress to stop playing politics and approve a new debt limit without further needless delay.”

Beaudoin also said that federal annuitants and workers recognize how important it is to use cash management tools to protect their fellow citizens from the catastrophe that would result if a default occurred. Contrary to the misinformation and propaganda that federal retirement assets were nearly bankrupt and our retirement benefits were bankrupting the nation, it is the solvency of the Civil Service Retirement and Disability Trust Fund that makes this possible.

“We have denied these claims because they are simply untrue,” the NARFE president said. “Now, once again, events are demonstrating that our funds are not bankrupt, but instead are strong enough to save the nation from bankruptcy.”  

The CSRDF currently holds government securities valued at $734 billion. Office of Personnel Management actuarial projections indicate that the fund will be able to meet its financial obligations in perpetuity.

In April, Treasury Secretary Timothy F. Geithner warned Congress that if it failed to raise the statutory federal debt limit before May 16, he would be forced “to take certain extraordinary measures” to prevent a default, including “… the suspension of new investments of the Civil Service Retirement and Disability Fund (CSRDF) and suspending reinvestment of the Government Securities Investment Fund (G Fund)” from the Federal Retirement Thrift Savings Plan. By taking these steps, the Treasury Secretary said he could delay a default until early July. Geithner has cautioned lawmakers that “default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.”

“Borrowing” Explained

Each day, the U.S. Treasury takes in several billion dollars for federal trust funds. For Social Security, these dollars come in the form of employer and employee payroll taxes. Federal employee and Postal Service contributions to the CSRDF also inject cash into the Treasury. Usually, this cash is immediately invested in nonmarketable government securities – to remain available to finance future benefits. But if a debt limit breach appears imminent, the Treasury Department could “underinvest” this revenue as it arrives. The trust funds would be given a temporary IOU that does not count against the debt ceiling, and the withholdings would be used to pay off the government’s cash obligations until an increase in the debt ceiling could be settled.  

The Treasury Department could also make cash available from the trust fund by “disinvesting” some of the money used to buy government bonds. Under this approach, bonds held on behalf of trust funds would be converted to cash earlier than normally needed. Like the “underinvestment” option, cash from this transaction would be used to pay federal obligations on a temporary basis.     

The disinvesting approach is a temporary accounting device that would help maintain the Treasury’s cash flow.  

Federal law requires that the TSP G Fund and the CSRDF be reinvested and made whole for any interest lost once a debt limit increase becomes law and the period of debt suspension ends. Indeed, the CSRDF was disinvested and underinvested in 1985, 1995, 1996, 2002, 2003, 2004 and 2006 to prevent the federal government’s default, and in each instance the fund was reimbursed with interest after Congress and the president agreed to raise the debt limit.  The 1985 debt crisis prompted the adoption of the “make whole” provision in the Consolidated Omnibus Budget Reconciliation Act of 1986, which NARFE fully supported, as an amendment to the retirement law.

Quid Pro Quo

At press time, the House majority leadership announced that it would hold “listening sessions” to determine what Republican representatives want in return for their support for an increase in the debt limit. Budget hawks in both parties and chambers are likely to demand large spending cuts and new procedures that require automatic across-the-board reductions when spending exceeds a specific limit (see cover story, pp. 20-22).  

Payment of federal annuity checks to retirees and survivors, and disbursement of, and the accrual of earnings to, the TSP’s G Fund accounts would be unaffected if Geithner disinvests and/or underinvests the civil service retirement trust funds to avoid a government default. However, if a default were allowed to occur, a broad range of government payments would have to be stopped, limited or delayed, including federal civilian and military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds. But as Geithner has said, “default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.”