- The Washington Times - Monday, May 11, 2009

A record number of pro-federal worker, pro-retiree proposals are in play on Capitol Hill. Most are embedded in the so-called tobacco bill, which easily passed the House. Many of the new civil service benefits were assumed to be favored by the Obama administration. Or not. …

In the first place, the tobacco bill faces a much tougher time in the Senate than it did in the House. That’s because the legislation would give the Food and Drug Administration regulatory control over tobacco and tobacco products. Tobacco is the biggest money-maker (and tax revenue generator) in at least a dozen states.

The fed-friendly benefits — ranging from a Roth IRA option for Thrift Savings Plan investors to sick-leave credit under the Federal Employees Retirement System (FERS) — were originally thought to be safe. That is, any flak would be directed at the tobacco regulatory changes, not the new federal perks.

But that may have changed. Federal union lobbyists who strongly backed and delighted in the election of President Obama are now worried that his administration may reject all of the proposed new perks with one exception: creation of a Roth IRA option within the Thrift Savings Plan (TSP), which is the 401(k) for millions of military personnel and civilian feds.

Giving feds a Roth option would be a break for many younger workers who have a long time to ride out the ups and downs of the stock market. All the earnings from those investments are tax-free when withdrawn (at least so far). By contrast, current contributions to the TSP (as with other 401(k) plans) are pre-tax. That means investors don’t pay taxes until they withdraw their money, and that means the government in some cases has to wait decades before it can tax either contributions or earnings.

The administration likes the expanded Roth option because it would pump millions of extra dollars into the Treasury sooner rather than later.

The plan to give TSP investors a tax-free Roth IRA option has cleared two of the three hurdles facing it. The House approved it as part of the tobacco bill, and the Federal Thrift Retirement Investment Board has said it will set up the Roth option once approved by Congress and OK’d by the White House.

But other pro-fed perks may run into opposition. That’s because — unlike the Roth option — they could be knocked out of a House-Senate compromise session if the White House decides they cost more than they are worth.

A different plan to give 401(k) investors more investment options — by putting money into outside mutual funds — is on less solid ground.

So is a proposal that would give the majority of federal workers (who are under the FERS retirement system) a cash incentive to save their sick leave. Under current law, long-time employees (under the civil service retirement plan) get credit at the time of retirement for unused sick leave. Each year of unused sick leave boosts their pensions by about 2 percent.

But FERS employees are under a use-it-or-lose-it sick-leave system. As a result, many burn up their leave in the last year on the job. By some estimates, this costs the government as much as $68 million per year in lost productivity. While that sounds like a big number, it might not mean much to senators and the White House, who are seeking new sources of tax revenue that the Roth proposal would provide.

Also in play on Capitol Hill is a proposal to give federal-military investors more models to choose from than the five options they now have. Currently, TSP investors can pick funds that index the U.S. stock market and a large chunk of the international stock market. There is also a bond-index fund as well as an ultra-safe Treasury securities fund available only to TSP investors.

The arguments for and against allowing TSP investors to put money into outside mutual funds are essentially the same:

Backers say that investors who want more specific investment choices should be allowed to put some of their money into gold, real estate or funds that invest primarily in certain regions like Latin America. Many believe that is where the real money is to be made, as opposed to much broader-based index funds that track entire markets.

Opponents reverse the argument, saying the TSP was set up to provide one-third to one-half of an employee’s retirement income. Putting it into index funds, they say, gives them a better chance of making money over time and reduces the risk they take by going into a targeted sector fund.

Those who want more choices say the opposition is being paternalistic.

Those who want to limit choices say they are being realistic.

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