February 21, 2013

The Department of Defense (DoD) formally announced plans to furlough a majority of its civilian employees as part of the spending cuts necessitated by sequestration.

The Secretary of Defense sent the following message to the workforce yesterday, saying that he had officially starting the furlough process by notifying Congress as required by law:

“Today, I notified Congress that furloughs could occur under sequestration. I can assure you that, if we have to implement furloughs, all affected employees will be provided at least 30 days’ notice prior to executing a furlough and your benefits will be protected to the maximum extent possible. We also will work to ensure that furloughs are executed in a consistent and appropriate manner, and we will also continue to engage in discussions with employee unions as appropriate.”

Other federal government offices will most likely implement furloughs as well, but DoD is notable because of its large workforce. And there is little reason to expect sequestration will not go forward at this point, at least for a few pay periods.

It is therefore prudent to plan for furloughs accordingly.

If you deduct a percentage of your pay for TSP contributions, your biweekly TSP contributions should go down automatically in proportion with your reduction in pay. At the risk of over-simplifying by not including pay roll and other taxes: A $2000 biweekly paycheck with a 10% deduction produces a $200 TSP contribution, while a $1600 paycheck (reduced by 20% due to furlough) with the same 10% deduction would produce a $160 contribution.

If, however, you deduct a specific amount each pay period, that amount would not go down in proportion to the reduction in pay. A set $200 TSP contribution should stay the same whether your paycheck is $2000 or a reduced $1600.

Either way, a 20% reduction in pay due to a sustained furlough is a significant cut in pay.

What’s more, reduced pay means reduced matching contributions. So while a person earning a $2000 paycheck would receive an extra $100 in matching contributions when contributing at least 5% of that paycheck to the TSP, a person earning a reduced $1600 paycheck would only receive an extra $80 in matching contributions. That’s a reduction of close to $1000 just in matching contributions through the rest of the fiscal year (September) if furloughs start in April and continue until then.

Like lost salary, these lost matching contributions most likely will not be restored when we’ve moved beyond the sequester.

And because there is still no budget for 2013 – and the continuing budget resolution ends in late March – there could be a partial government shutdown if there is not a budget agreement by then. For most workers, investing in the TSP and other accounts might no longer be feasible until the current budget situation is fixed and we can all get back to work. It really is back to basics.

Related topics: g-fund military-investing