Once again, a program created for federal employees is being held up as a model for reform.
President Bush, in his closing remarks at the White House economic conference last week, suggested that the Thrift Savings Plan could be a starting point for overhauling Social Security to allow the nation's workers to shift some of their payroll taxes into personal investment accounts.
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Any change to Social Security would include "a managed account, similar to the thrift savings plans that we federal employees have available to us now," Bush said.
In past years, members of Congress and presidential candidates have pointed to the Federal Employees Health Benefits Program, which features choice and stable benefits, as a possible model that could be adapted to expand health insurance coverage in the nation.
But making FEHBP available to non-government employees has never taken off, usually because the White House and Congress fail to find a political consensus on how to address the high cost of government-subsidized health care.
Bush's plan to revamp Social Security by adding personal accounts will encounter its own set of political and budgetary hurdles. While Bush has a long way to go in selling his idea, especially to congressional Democrats, the TSP offers a case study for the coming debate.
TSP provides choice, although limited, and low administrative costs to about 3.4 million participants. It relies on the expertise of a global banking company, and its investment policies are insulated from politics.
Liz Ann Sonders, chief investment strategist at Charles Schwab and Co., and Richard Parsons, chairman and chief executive at Time Warner Inc., joined Bush at his economic conference last week in suggesting that a program similar to TSP could become part of Social Security. Parsons called TSP a "great example. . . . The result is superior, particularly compared to the returns you would get leaving that money with the government."
TSP is a 401(k)-type program that allows government employees, including members of Congress, to save for retirement by investing pretax dollars into funds that mirror the markets. Three of the funds are based on stock indexes, one is a bond index fund and one is a special government securities fund. The plan's assets are valued at $148 billion.
Over a 10-year period ending in 2003, TSP produced annual compound returns of 11 percent in its large U.S. company stock fund, 9.7 percent in the small and mid-size U.S. stock fund and 4.3 percent in the international stock fund. The returns for the latter two funds represent estimates, because they were not offered by TSP until 2001.
TSP's bond fund produced a 10-year annual compound return of 7 percent, and the government securities fund realized a 6 percent return.
The program's stock and bond funds are managed by Barclays Global Investors, based in San Francisco. The company is a subsidiary of Barclays, the British banking giant.
Kathy Taylor, a Barclays managing director, said the firm does not disclose, for competitive reasons, what it charges the TSP in investment management fees.
She said Barclays has "incredibly low trading costs" and uses its size and technology to "extract the lowest possible trading commissions" when investing TSP cash in the stock and bond markets.
According to testimony provided a Senate committee in March, TSP has charged its participants much less in administrative fees than major mutual funds over the last decade. This year, participants are paying 60 cents in administrative fees for every $1,000 of account value.
TSP participants, of course, make their own investment decisions, and their track record has been mixed. Some allowed their accounts to tilt more heavily into stocks during the late 1990s and were hit hard by the 2000-02 downturn. The U.S. stock fund, for example, lost 22 percent in 2002, and the international stock fund lost a similar amount in 2001.
Parsons said any Social Security overhaul should place limits, at least initially, "on how much discretion you have in terms of investing the funds."
Bush appeared to agree and added, "People are not going to be allowed to take their own money for the retirement account and take it to Vegas to shoot dice."
Federal Diary associate Eric Yoder contributed to this column.
