The Congressional Budget Office’s recent study on federal employee pay found that federal retirement benefits were about 3.5 times more generous than those paid to similar workers in the private sector, helping drive an overall compensation premium of around 16 percent over private sector levels. But the CBO study missed an important benefit offered to federal employees that Jason Richwine and I caught in our own analysis of federal pay.
In addition to a traditional defined benefit pension plan, federal employees participate in the defined contribution Thrift Savings Plan. There is a little-known but generous subsidy to the largest investment fund in the TSP, the so-called G fund, which invests in special-issue U.S. Treasury securities. What most people don’t know is that the G fund pays significantly higher interest rates than similar Treasuries available to private sector workers with 401(k) pension plans.
The TSP states: “Although the securities in the G Fund earn a long-term interest rate, the Board’s investment in the G Fund is redeemable on any business day with no risk to principal. The value of G fund securities does not fluctuate; only the interest rate changes.” This is unlike marketable Treasuries, which like any bond will rise or fall in value as interest rates change.
The TSP advertizes this as “The G Fund Advantage.”
“The G fund rate calculation described above results in a long-term rate being earned on short-term securities. Because long-term interest rates are generally higher than short-term rates, G fund securities usually earn a higher rate of return than do short-term marketable treasury securities…. From January 1988 through December 2010, the G fund rate was, on average, 1.77 percentage points higher per year than the three month T-bill rate.”
In effect, the G fund receives an interest rate subsidy of around 1.77 percentage points versus marketable investments of similar risk. In other words, if federal employees were offered marketable Treasuries the same as everyone else, they would receive less interest and the federal government would reap the savings. As of December 31, 2010, the G fund held $128.6 billion, making for an annual interest rate subsidy of around $2.3 billion. That’s equivalent to raising average federal salaries by around 2 percent.