Tuesday, February 12, 2008

Each year, tens of thousands of federal and postal workers borrow money from their in-house 401(k) plan. Many do it for good reason: to pay for college, pay off student loans or buy a house. Paying down major credit-card debt because of high interest rates is another favorite reason to dip into the retirement fund.

Feds are allowed to repay what they borrowed from their Thrift Savings Plan (TSP) accounts.

Many private-sector plans don’t do loans because they don’t want to bother with the paperwork or otherwise serve as a bank, but that “perk” for feds can have a downside.

While feds have the borrowing privilege, the question is: Should they use it?

We put the question to Ed Zurndorfer, a certified financial planner based in Silver Spring. In a word, his answer is: No, or at least hardly ever.

The question grew out of an e-mail from an employee of the Department of Health and Human Services. He wanted to know whether he should borrow from his TSP account to pay down his large credit-card bill.

Mr. Zurndorfer said that running up a big credit-card bill is bad, but so is borrowing from the TSP to repay it. He cites two big reasons for leaving your TSP account alone:

• The money you are pulling out for the loan will lose earnings. Think what would have happened had you pulled out $10,000 in January 2007 from the C, S and I funds. By Jan. 1 this year, you would have lost almost $1,000 of earnings.

• When you pay back the TSP loan, with interest, you are using “after-tax” dollars. This money will be taxed again when you pull them out of the TSP, resulting in double taxation.

“If this person has much in credit-card debt, here are two suggestions,” Mr. Zurndorfer said. Reduce, but don’t suspend, your TSP contributions. Contribute at least 5 percent if you are under the Federal Employees Retirement System to get the maximum match and use your extra money to pay down or off those credit cards. Otherwise, go out and get another job. Work on weekends and use those extra dollars to pay the credit-card debt.

Federal pay raise by the numbers

If you engage in long-range budgeting and want to know the size of the next federal pay raise in January, pencil in these numbers: 2.9 percent, 3.4 percent and 4.4 percent. Here’s why.

The president’s budget proposes a 2.9 percent raise for white-collar civil servants (postal employees have their own contract), and a 3.4 percent raise for members of the Army, Navy, Air Force, Marine Corps and Coast Guard.

By the way, it’s unusual but not unprecedented for civilian feds, who have a much higher average salary, to be in for a smaller percentage increase than military people. When that has happened in the past, Congress usually approves a pay raise parity bill that gives all members of the federal family the same percentage increase. Most civilians wind up getting more thanks to locality pay adjustments.

Late last year, Congress authorized and the president signed a 3.5 percent civilian/military pay raise effective in January. But once locality pay was factored into the equation, the largest group of federal civilians — people in the Washington-Baltimore area — got a 4.49 percent raise. The military got a flat 3.5 percent.

Unions and key members of Congress are demanding pay raise parity for civilian and military people. That would bump up the 2009 civilian pay raise to 3.4 percent.

But the American Federation of Government Employees, for one, says it will seek a 4.4 percent raise. AFGE figures that much (and more) is due under the 1990 federal pay law formula. That Federal Employees Pay Comparability Act promised a series of annual raises, both national and locality, beginning in 1993. The idea was to link federal and hometown pay for like jobs, and to move up civil servants gradually using private-sector wage data collected by the Labor Department.

The formula was not followed by the Clinton or Bush administrations. Both presidents said it failed to weigh the value of federal fringe benefits, such as holidays, lifetime health insurance coverage, sick leave and, most importantly, guaranteed pensions linked to inflation.

The bottom line is that feds have never closed the pay “gap.” Instead of automatic raises, as envisioned by the 1990 law, pay raises are approved only after a lengthy fight each year between the president and Congress.

So pencil in all three numbers if you like to keep score and to handicap the annual pay raise derby. But don’t base your spending on any of them until Congress passes a bill and the president signs on the dotted line.

Mike Causey, senior editor at Federal News Radio AM 1050, can be reached at 202/895-5132 or mcausey@ federalnewsradio.com.

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