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Nest egg plan for federal workers might be difficult to match on grander scale

WASHINGTON—When President Bush pitches his proposed personal-investment accounts for younger workers, he suggests that they'll match the high returns and low costs of the federal Thrift Savings Plan, a retirement perk for federal employees.

The TSP is an attractive model, but it's fundamentally different from Bush's proposed accounts.

Some 3.4 million current or former government employees, from senators to soldiers, participate in the TSP. It works like a private sector 401(k) plan and administers more than $151 billion in employee-retirement money invested in index funds for stocks and bonds.

Bush likes the TSP's lean structure: fewer than 100 employees and very low administrative costs. He especially likes the returns: The TSP's C Fund, a stock index created in 1988, boasts a compound average annual return of 12.05 percent.

"The TSP shows that if you have people investing in index funds that track the market as a whole, your investing experience is going to be positive," said Matt Moore, a Social Security expert with the National Center for Policy Analysis in Dallas, a conservative research center. "The TSP provides a good model for showing you can keep the costs very low and protect people who are inexperienced investors."

But the TSP differs fundamentally from the president's proposal: It's an add-on for government employees, who still pay full Social Security taxes. Bush proposes that when workers divert, say, $500 of their Social Security taxes into the new accounts that their Social Security guaranteed benefits be reduced $500.

TSP investors can set aside up to 15 percent of their salaries—up to $14,000—to be invested in one of five indexed funds that carry varying degrees of risk. Contributions are tax-deferred until retirement. That allows government workers to reduce the amount of their current salaries they pay federal income taxes on.

The TSP also is more generous than many 401(k) plans. Uncle Sam matches federal workers dollar for dollar for the first 3 percent of their salaries they put in the TSP, and 50 cents per dollar for the next 2 percentage points of their salaries.

Bush proposes no similar tax deferral or government match for his new accounts. He'd allow workers to divert 4 percentage points of their salaries—up to $1,000 annually, rising over time—to the private accounts. That's almost two-thirds of the 6.2 percent of wages they now pay in Social Security taxes. If they invest in the new accounts, they'd lose the equivalent in guaranteed benefits—unlike TSP investors.

Francis X. Cavanaugh helped create the TSP in the 1980s and was the first chief executive officer of the agency that oversees it, the Federal Retirement Thrift Investment Board. He sees a parallel with today's debate because the TSP was created to ease the transition when a costly civil-service retirement system was scrapped. But he thinks Bush is overselling the TSP's returns.

"That's really all they have been explicit about. That's where it all ends, because everything else they are talking about wouldn't fit the ... thrift model," Cavanaugh, who's now retired, said in an interview.

The TSP has enviably low administrative costs because there's just one employer involved, the federal government, and only 129 payroll centers. That's a manageable bureaucracy. Those payroll centers have 12 days from any pay period to send contributions to a contracted fund manager.

By contrast, more than 6.5 million private employers handle employee-payroll deductions on a per-paycheck basis. By law, these employers have an entire three-month quarter to report payroll taxes to the Internal Revenue Service, which later notifies the Social Security Administration to credit an individual's accrued retirement benefits.

Any new TSP-like entity would have to deal with millions of employers who collect and report payroll taxes. Would those employers, the IRS or the Social Security Administration transfer the diverted payroll deductions into the investment fund? And how quickly?

"That is something that is still being reviewed: the specifics of how the flow of funds would work," said Claire Buchan, a deputy White House press secretary.

The answers are vital. In Bush's bid to make Americans "owners" of their retirement assets, millions of people could become second-class citizens in the investment game.

Here's how: If methods of collecting payroll taxes remain unchanged under personal accounts, three months could pass between when the money is deducted and when that's reported to the government. It could take even longer to invest it.

TSP investors' money is invested within weeks, but Americans who choose Bush's new accounts could be sidelined from the markets for months, losing potential gains.

One fix would be to have employers report the payroll deductions faster or have them divert the money directly to the new TSP-like entity—but that worries the National Small Business Association.

"It would be difficult if they were to individually saddle the millions of small businesses with these (personal) accounts," said Todd McCracken, the association's president. "It could create new administrative problems."

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(c) 2005, Knight Ridder/Tribune Information Services.

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