Conservative think tank American Enterprise Institute is the last place to look for a vigorous defense of government employees’ Thrift Savings Plan. Yet AEI resident scholar Andrew G. Biggs commits a bit of free market heresy in praising TSPs in making a case for more Thrift-like features in 401k plans.
Biggs does it by taking a hard look at the benefits government pensioners receive, and how they’re achieved.
“The thrift savings plan has a simple structure built around a small number of widely diversified investment options that carry practically no administrative costs,” he notes. “It offers a ‘target date’ investing approach in which the plan automatically shifts federal employees’ savings from stock to bond funds as they approach retirement.”
At retirement, the TSP offers annuities that let workers convert their lump sum savings into a monthly benefit that last for life.
“What’s not to like?” he rhetorically asks, before debunking criticism leveled by Joanne Butler, a former colleague and House Ways and Means Committee staffer.
“Here’s the troubling part,” according to Butler. “The average account balance for those 47,000 people is $346,000.” If those federal employees “withdrew just $30,000 for their income, their nest egg of $346,000 would last them about eleven years. The retiree also would receive Social Security benefits plus a small federal annuity benefit – let’s say that bumps the retiree up to about $35,000 a year. It’s still not much.”
Hogwash, Biggs claims. To start, the average TSP participant with “only” $346,000 in savings has only participated in the plan for 30 years. A more realistic working lifetime in today’s America is closer to 45 years. Adding an additional 15 years of 3 percent real interest bring it to $539,000 in today’s dollars, even assuming no additional contributions. Using financial advisors’ “4 percent rule” for retirement withdrawals, the TSP by itself would pay out about $21,500 per year.
“Federal employees also receive a FERS benefit equal to 1.1 percent of final salary multiplied by their years of service,” he adds. “The average federal employee who has worked at least 35 years has an annual salary of $99,000. So let’s call this a $38,000 pension. Federal employees also receive Social Security, which would add another $23,500 at age 65. So this full-career federal employee would retire on about $83,000 per year, equal to 84 percent of their final salary. Any financial planner would say that’s more than adequate.”
When the TSP is added to other savings, Biggs concludes, the numbers add up to a very decent standard of living in retirement.
“The key to the thrift savings plan is to get people signed up and saving and to invest those savings widely across sectors at the lowest possible cost.”