NCPA - National Center for Policy Analysis

Federal Thrift Savings Plan

June 4, 2003

In just 15 years, workers' Social Security payroll taxes will fall short of what is needed to pay promised benefits, and the system will require increasing cash transfers from general revenues, says Matt Moore, a policy analyst with the National Center for Policy Analysis.

One way to begin alleviating the shortfall, explains Moore, is to allow workers to set aside a portion of their Social Security taxes in Personal Retirement Accounts (PRAs). These accounts would earn a market return over the workers' lives and replace some of the retirement benefits promised by Social Security. However, there are several concerns about a PRA system:

  • Would the government be able to manipulate the stock market or make politically motivated investment decisions with PRA funds?
  • Would inexperienced investors make poor investment choices?
  • Would investors be subject to undue risk due to stock market volatility?

Used as a model, the Thrift Savings Plan (TSP) -- a low-risk, low-cost retirement savings plan for federal employees -- demonstrates ways to allay these concerns. The TSP is a voluntary program that functions like a 401(k) for federal employees, including members of Congress. Currently, the TSP manages about $100 billion in three million federal employees' individual accounts.

Of course, the Thrift Savings Plan and Personal Retirement Accounts differ in significant ways.

  • Notably, the TSP monitors fewer than 5 million accounts, while the Employee Benefits Research Institute predicts that a Social Security PRA plan could include up to 148 million participants.
  • Many options available to TSP participants, such as the ability to borrow against their accounts, would likely be unavailable to personal account holders.
  • Social Security PRAs would be more difficult to manage because participants' incomes, earnings records, and types of employers and employment would be so diverse.

Still, the TSP is an excellent small-scale model for the structure and administration of PRAs, says Moore.

Source: Matt Moore, "The Federal Thrift Savings Plan: A Model for Social Security Reform," Brief Analysis, No. 443, June 4, 2003, National Center for Policy Analysis.

For text


Browse more articles on Tax and Spending Issues