Lower TSP expense

[donheff]

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Originally Posted by Texarkandy I think I speak for most feds when I say they would gladly be covered under the good ole CSRS plan where the retiree gets a full pension. (which by the way has a better COLA formula than FERS)

Well, yes and no. Anyone who stays long enough to retire would be better off under the old program. But most Feds don't stay for an entire career. FERS was designed to balance a decent retirement program with portability. You can take most of it with you when you leave government. The early retirement and COLA provisions are not as generous as the old system but the combination of the FERS 1/3 (partial COLA) and Social Security (full COLA) make for a decent foundation. The feds needed to do something - not paying into social security was causing a lot of backlash as the SS debates ramped up in the 70s early 80s.

As to the ruination of the TSP or the Federal health benefits program by opening them to the general public, I think that is speculation, not fact. My nephew (caught with cancer two months after college graduation and termination of health coverage) ran for Congress in 1992 with his health system woes fresh in mind. He had a fairly well thought out proposal to open the Fed health program and the research indicated the risk pool could be kept wide and the system could be protected.

[Johnphx]

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Originally Posted by donheff Well, yes and no. Anyone who stays long enough to retire would be better off under the old program.

Who is it that doesn't stay long enough? If you leave early there are significant penalties (5% per year before the MRA) that apply to the pension portion of the benefits. Unless you are talking about congressman and senators and I believe they just might vest differently than other members.

Quote:

Originally Posted by donheff The feds needed to do something - not paying into social security was causing a lot of backlash as the SS debates ramped up in the 70s early 80s.

I was only a minor child in the 80's so I wasn't around for those debates, but I don't understand what was to debate. Those that didn't pay into SS also didn't collect SS either. They still paid that money from their paychecks just like SS people do, it just went towards their pensions instead (which is really what SS is like).

I would love to have the opportunity to opt out of the SS program and forfiet any future benefits (and I have worked since I was 14, full time and living on my own since 16) altogether and be allowed to put the entire 12.4% into an alternative vehicle for my own personal savings (like the TSP).

I would be willing to wager there are alot of people (obviously not represented on this board) that don't even save 12.4% of their pay as it is.

[Khan]

To all and sundry: the TSP is not an alternative to SSA. It is a 401k thingy.

[Johnphx]

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Originally Posted by Khan To all and sundry: the TSP is not an alternative to SSA. It is a 401k thingy.

True and if your implication is that the TSP is not a risk free retirement system in comparison to OASDI, I understand that. However the SS system is also not without risk.

I do believe that something will eventually be done about the system.
What that will be I don't know, but until then my statements tell me that I will only get 75 cents on the dollar under the current system. A forecast of a 25% "loss" that I have no way to alter is worse I think.

[samclem]

Quote:

Originally Posted by Johnphx I was only a minor child in the 80's so I wasn't around for those debates, but I don't understand what was to debate. Those that didn't pay into SS also didn't collect SS either. They still paid that money from their paychecks just like SS people do, it just went towards their pensions instead (which is really what SS is like).

The debate and backlash donheff referred to was related to the dissatisfaction that you are expressing about SS. People resented the fact that the law required them to pay into SS, while federal employees were not required to do so. As SS began to be seen as a relatively poor "deal" for most Americans, the dissatisfaction with allowing government employees out of the SS system also grew. The public wanted everyone to be shackled to the same system. I think that makes sense.

Now, if we could make Congress live with the typical 401K offerings most private sector employees get, maybe we'd see some reform there, too.

[Johnphx]

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Originally Posted by samclem The public wanted everyone to be shackled to the same system. I think that makes sense.

I see.

So the solution was instead of figuring out how to unshackle the majority, it would be better (or perhaps it was just more politically feasible) to shackle the minority.

Lets not fix the system if its broken, lets make sure everyone suffers equally!

[donheff]

Quote:

Originally Posted by donheff Well, yes and no. Anyone who stays long enough to retire would be better off under the old program. But most Feds don't stay for an entire career.

Quote:

Originally Posted by Johnphx Who is it that doesn't stay long enough? If you leave early there are significant penalties (5% per year before the MRA) that apply to the pension portion of the benefits. Unless you are talking about congressman and senators and I believe they just might vest differently than other members.

As I noted in my quote - most Feds leave for private sector employment before they are eligible to retire, often after just as few years, sometimes after 10 or 20 years. Under the new program, they take their TSP and social security with them. They can choose to leave the pension component in the system or take a lump sum. Under the old system, someone who left the system could take a lump sum of what they paid into the pension (a paltry amount that did not include the employer contribution) but they had no TSP style 401K and they had no social security for the period of Federal employment.Leaving your money in the system was an option. In that case you could take a deferred annuity at age 62. But the annuity was based on your earnings rate back when you worked for the government - inflation would have turned that into a pittance by the time you reached 62, and the rules gave less credit to early years of employment in calculating the annuity.

Combine all of those negative features for leaving with the very good results if you stayed and you can see why the old retirement system was described as "golden handcuffs."

[Texarkandy]

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Originally Posted by donheff ...... But most Feds don't stay for an entire career. .....

Is that just your impression or are there some hard stats on that? (not being a smart-aleck - truly just wondering)

In my field most are in for an entire career.

[FUEGO]

Does anyone know if administrative expenses, record keeping, auditing, customer service, allocation to individual participants, etc etc are paid for out of the .015% expense ratio? Or does the government fund these "overhead" type expenses by calling them human resource expenses? In other words, is the .015% only paying for research and investment management/execution of the fund but not administrative overhead? Just curious...

I'll add that vanguard is currently offering sub-0.03% ER's on some funds for large accounts (institutional plus accounts w/ more than $200,000,000 and "employee benefit" accounts w/ $400 million in assets, the latter account having negotiable ER's). Definitely in line w/ what TSP is charging.

[Texarkandy]

In re: Social Security

I suspect as we get more towards a crisis it will be severely means-tested to make it a program for lower income folks only (though we'll all pay for it)

Something along the lines of - if you make less than 30K a year you get full with probably a 2% reduction for every $1K you make over 30K - so someone who gets 80K a year (earned or retirement - it won't matter) will get nothing.

I further suspect the earnings cap for paying into SS will be raised significantly or done away with all-together.

The under-50K a year voters & the politicians who pander them will make this happen. It will become the ultimate transfer-of-wealth program.

The govt has made promises to FERS employees as re: SS being the third leg of their retirement - but those promises can & probably will be broken

That pessimistic enough for ya?

[samclem]

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Originally Posted by Johnphx I see. So the solution was instead of figuring out how to unshackle the majority, it would be better (or perhaps it was just more politically feasible) to shackle the minority. Lets not fix the system if its broken, lets make sure everyone suffers equally!

Like you, I'm a fan of increased privatization of old age support issues. However, we must face two facts (and I came to believe them after much kicking and screaming):
- 1) If there are poor people (young or old) the American public will vote to give them money. That money must come from taxes--probably on you and me.
- 2) Individuals have done a very poor job of taking care of their long-term financial health. Yes, a dose of some very bitter medicine may jolt the next generation to their senses, but for now, look at 401K participation rates, the degree to which people raid their 401Ks for various expenses, and the way people invest their 401Ks and you'll come to the realization that a complete hands-off approach to letting people manage their retirement accounts (in a private socail security setup) would lead to many people having very little at retirement. Then, see rule #1 above. You'd pay the bill.

Social Security (along with welfare benefits, food stamps, etc) is part of the safety net that allows the rest of our capitalist system to exist. These systems can be viewed as providing the assistance to those who have very little and who might be forming mobs in the street, breaking into stores, committing individual crimes, and voting for socialist governments. Basically, money spent on these programs keeps a lid on social dissatisfaction that has undermined many representative republics which tried pure capitalism.

This article by William Bernstein is interesting. I don't agree with all of it, but it does shed some light on a different way of thinking about the purpose of SS.
God Bless this Ponzi Scheme

I'd be in favor of a slowly phased-in privatized adjunct component to SS. Younger workers could put a small portion into private accounts, with the proportion increasing in coming years. Everyone would still pay into something like the present system, though in decreasing amounts. The present system is slowly morphing to a needs-based system of inter-generational wealth transfer--another welfare system. That's okay as long as people can build wealth in their private accounts. The investments would have to be in a fixed set of regulated investment choices, like TSP, but with some rules on asset allocations and withdrawal rates.

[W2R]

Quote:

Originally Posted by Texarkandy In re: Social Security I suspect as we get more towards a crisis it will be severely means-tested to make it a program for lower income folks only (though we'll all pay for it) Something along the lines of - if you make less than 30K a year you get full with probably a 2% reduction for every $1K you make over 30K - so someone who gets 80K a year (earned or retirement - it won't matter) will get nothing.

I was thinking about this and you know, they could do something along these lines by just making one simple change. Remember how they can reduce your SS checks if you work and earn over a certain amount? They could just say, "Oops! Investment or pension income isn't any different from earned income, since it's all money and income is income, so we'll continue just as before but now we will include all income sources in SS reduction computations".

[ats5g]

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Originally Posted by FUEGO Does anyone know if administrative expenses, record keeping, auditing, customer service, allocation to individual participants, etc etc are paid for out of the .015% expense ratio? Or does the government fund these "overhead" type expenses by calling them human resource expenses? In other words, is the .015% only paying for research and investment management/execution of the fund but not administrative overhead? Just curious... I'll add that vanguard is currently offering sub-0.03% ER's on some funds for large accounts (institutional plus accounts w/ more than $200,000,000 and "employee benefit" accounts w/ $400 million in assets, the latter account having negotiable ER's). Definitely in line w/ what TSP is charging.

From Summary of the Thrift Savings Plan

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Administrative Expenses TSP expenses (i.e., the cost of administering the program) include management fees for each investment fund and the costs of operating and maintaining the TSP’s record keeping system, providing participant services, and printing and mailing publications. These expenses are paid from the forfeitures of Agency Automatic (1%) Contributions of FERS employees who leave Federal service before they are vested, and — because those forfeitures are not sufficient to cover all of the TSP’s expenses — earnings on participants’ accounts. The effect of administrative expenses (after forfeitures) on the earnings of the G, F, C, S, and I Funds is measured by the expense ratio of each fund. The expense ratio for a fund is the total administrative expenses charged to that fund during a specific period, divided by that fund’s average balance for that period.

[Robert the Red]

When noting the low ER for TSP, it is also important to realize that some of the expenses are 'paid' by employees who forfeit the 1% contributions the Government puts in for all employees -- if someone quits (or is fired) before the probationary period is over. In principal, if enough of this stuff happened, the reported ER could go to zero. This is a cost recovery mechanism not available to mutual funds.

[donheff]

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Originally Posted by Texarkandy Is that just your impression or are there some hard stats on that? (not being a smart-aleck - truly just wondering) In my field most are in for an entire career.

This was in response to my quote that "most Feds don't stay for an entire career." As specifically worded (most= more than 1/2) that is my impression, not a fact. But I do know the separation rate in early years of employment (less than 10) is high and I believe it is over 50%. I was a Federal HR Director for many years and was working in employee relations (includes retirement system administration) at the time the new FERS system was adopted. I read many of the studies that went into the system design and can remember being surprised at how high the turnover rate (out of government, not between agencies) was. The numbers were regularly cited to show employees the portability benefits of the new system. A substantial number of employees with few years of service, and even a fair number with many years of service, elected to move into FERS rather than stay in the the old system. They wanted the portability so they could leave government for those lucrative private sector jobs. I know quite a few who stayed with the government or returned after a brief absence who regretted switching to FERS.

[samclem]

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Originally Posted by Robert the Red . . . some of the expenses are 'paid' by employees who forfeit the 1% contributions the Government puts in for all employees --

Very minor correction: The military services have elected not to provide any TSP match for military personnel who participate in the TSP. But, since they aren't commonly thought of as "employees," I suppose your statement is correct after all.

I guess military folks benefit from the lower ER produced by civilians who abandon the program early.

[Texarkandy]

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Originally Posted by samclem ... Social Security (along with welfare benefits, food stamps, etc) is part of the safety net that allows the rest of our capitalist system to exist. These systems can be viewed as providing the assistance to those who have very little and who might be forming mobs in the street, breaking into stores, committing individual crimes, and voting for socialist governments. Basically, money spent on these programs keeps a lid on social dissatisfaction that has undermined many representative republics which tried pure capitalism. ....

"and voting for socialist governments"

This is the thing I wonder about

(and further makes me ponder whether everyone's vote should really count the same - particularly re: folks who are are on the dole)

I wanna be a super-delegate - my one vote should count for three

[donheff]

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Originally Posted by Texarkandy "and voting for socialist governments" This is the thing I wonder about (and further makes me ponder whether everyone's vote should really count the same - particularly re: folks who are are on the dole) I wanna be a super-delegate - my one vote should count for three

Better watch out, we had another thread in which some economist accused all of us FIREees of being selfish nincompoops ruining the country. He would take the vote away from us and give it to people who never saved a dime but work into their 70s

[Johnphx]

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Originally Posted by Want2retire I was thinking about this and you know, they could do something along these lines by just making one simple change. Remember how they can reduce your SS checks if you work and earn over a certain amount? They could just say, "Oops! Investment or pension income isn't any different from earned income, since it's all money and income is income, so we'll continue just as before but now we will include all income sources in SS reduction computations".

This would unabashedly discourage (and discriminate against) savers.

I would of course need to continue saving. It is in my nature to do so (although it wasn't always) and current estimates of SS don't satisfy current estimates of my expenses.

But wouldn't such a system encourage the young to make every effort to keep regular expenses as low as possible and spend every dime for the present without thought to savings because they would then get a free ride in retirement?

[Texarkandy]

Quote:

Originally Posted by Want2retire I was thinking about this and you know, they could do something along these lines by just making one simple change. Remember how they can reduce your SS checks if you work and earn over a certain amount? They could just say, "Oops! Investment or pension income isn't any different from earned income, since it's all money and income is income, so we'll continue just as before but now we will include all income sources in SS reduction computations".

Quote:

Originally Posted by Johnphx This would unabashedly discourage (and discriminate against) savers. I would of course need to continue saving. It is in my nature to do so (although it wasn't always) and current estimates of SS don't satisfy current estimates of my expenses. But wouldn't such a system encourage the young to make every effort to keep regular expenses as low as possible and spend every dime for the present without thought to savings because they would then get a free ride in retirement?

A non-saver socialist society would be a good thing according to more & more people in this country. Give your all to the Central Government & the Central Government will ensure you have your bread & circuses (& a big screen TV).

Personally, I blame the public education system & the "Great Society" agenda for creating those people.

(BTW I did get a big-screen a few months back )