The article in the December 22-28 issue of the River Cities' Reader titled "Can Mike Whalen Save Social Security?" states, "Virtually all proponents [of privatization] use the Thrift Savings Plan as evidence of the wisdom of privatizing Social Security." But your readers would have been better served if a little "wisdom" had been applied to the paragraphs preceding this statement, in which you attempt to explain the workings of the Thrift Savings Plan in a brief passage that combined unattributed sentences with direct and indirect quotes from Mr. Whalen. What came out was so misleading and riddled with inaccuracies that it's hard to know where I should start.
The passage begins by stating that the Thrift Savings Plan "has basically served as a pilot program for Social Security privatization." In fact, the Thrift Savings Plan has served as a savings and investment vehicle that functions much like the 401(k) plans offered through many employers in the private sector. Like a 401(k), the Thrift Savings Plan was designed and intended as a supplement to Social Security, not as a model for its replacement, as Mr. Whalen seems to think.
You then somewhat accurately described the five investment options open to Thrift Savings Plan participants, although you failed to name them. Those options are the G Fund, made up of government securities; the F Fund, made up of high-quality bonds; the C Fund, made up of common stocks such as those traded on Wall Street; the S Fund, made up of small-capitalization stocks; and the I Fund, made up of stocks traded on international markets.
Your article then states (without attribution), "From 1993 through 2002, the annual rate of return on all of those funds ranged from 3.92 percent to 9.29 percent." First, it should be noted that the S Fund and I Fund weren't part of the Thrift Savings Plan until 2001, and so had no real "annual rate of return" before then. It is possible to project what the returns on the S and I Funds would have been by using other benchmark funds, as the Thrift Savings Plan Web site does.
More importantly, most people would read this sentence to mean that the worst performance of any of the funds in any given year was a gain of 3.92 percent. This is absolutely incorrect. In fact, four of the five funds posted annual losses during specific years selected from the 10-year period under discussion. For example, the C Fund lost 9.14 percent in 2000, 11.94 percent in 2001, and a whopping 22.05 percent in 2002. 2002 was also a very bad year for the S Fund, which lost 18.14 percent, and the I Fund, which lost 15.98 percent.
The sentence likely refers to the compounded (not "annual") returns that the funds achieved over those 10 years. The Thrift Savings Plan Web site currently posts 10-year returns from 1994 through 2003. This measure shows compound returns ranging from 4.32 percent for the I Fund to 10.99 percent for the C Fund.
However, such returns were only enjoyed by those who stuck to a "buy and hold" strategy and who did not move their money out of funds that were currently "losing" money, only to miss out on the gains that followed. Cautious Thrift Savings Plan investors are also advised to migrate their money away from the high-risk C, S, and I funds and toward the low-risk G fund in the years immediately preceding retirement, to avoid having their nest eggs drastically reduced by a short-term decline in the market.
Both of the classic errors I just cited have been made numerous times by federal employees who, as a group, are better educated and more financially sophisticated than the public as a whole. Given the dismal state of financial education in this country and the general lack of understanding of concepts such as dollar-cost averaging and risk versus reward, I believe that the actual return on investment achieved by real people would be quite a bit less than that envisioned by Mr. Whalen, should an instrument similar to the Thrift Savings Plan be suddenly foisted upon the public as a partial or total substitute for Social Security.
If you'd like to learn more about the Thrift Savings Plan, let me refer you again to its Web site: (http://www.tsp.gov). The site makes it clear that there is a risk of loss associated with all of the funds except the government-backed G Fund, and that past returns are no guarantee of future performance. In contrast, your article chose a 10-year period that included some of Wall Street's best years as its benchmark, compares these returns to the supposed "return on investment" offered through Social Security, and implies that the Thrift Savings Plan is "extremely conservative" when, in fact, it contains high-risk investment options.
Assuming that the National Center for Policy Analysis was the source for the passage on the Thrift Savings Plan, their campaign to "educate the public" about Social Security reform needs to be taken with a very large grain of salt. While I don't disagree that some changes may need to be made to Social Security, I do question the credibility of those who base their arguments to "save" the system upon specious statistics and wholesale misrepresentations.
Editor's note: The author is correct that the rates of return cited in the article reflect 10-year averages of the funds (or, in the case of the S and I funds, their equivalents), not the full range of their annual performances from those years. The Reader regrets the error.