A brief history of the Thrift Savings Plan, and why you need it
Where did the thrift savings plan come from and why do you need it?
In the beginning there was work; and then people died. Back in the day, American civilians simply worked until they couldn’t work anymore, and then they either relied on family to care for them, or they passed away. In the mid 1800s, a couple of companies took a look at the military’s retirement system and decided to give it a try.
The Thrift Savings Plan as we know it came into effect long after the civilian version of retirement due to the Federal Employees’ Retirement System Act of 1986. The TSP is the public sector’s version of the 401(k) that was established under the Revenue Act of 1978.
But the TSP was not the military’s first pension plan. According to Pension Research Council, pensions for the military predate the Constitution, but the U.S. Navy and Army struggled to manage pension funds — so much in fact that the new government had to bail them out at least three separate times.
Despite early issues with managing pension funds, the Army and the Navy continued to offer them as a means to attract and retain men in the services.
Eventually corporate America got on board and started to adopt its own retirement system modeled after the public pension system offered by the American military.
The private pension system was designed to reward line workers (those who worked in factories or on production lines) for years of service to one company. This worked both to the advantage of the individual as many skills were not transferable outside of a specific industry, and to employers because it guaranteed most of their employees would be loyal to them.
There were two problems with the way the pension system was set up: companies had to figure out how much money every year to set aside based on the number of employees they had, and many companies mismanaged that money just as the military had a century prior.
Thus, the 401(k) Individual Retirement Account, or IRA, was born by an act of Congress in 1978. With this system, employers agreed to set a predetermined amount of money aside, and employees agreed to manage it themselves.
As a result of the remodeling of the private pension system, our modern day public pension (the Thrift Savings Plan) was designed nearly a decade after the private pension plan.
So why do you need a TSP? Regular military retirement pay was never intended to fully provide for normal retirement.
The TSP was designed to supplement retirement pay, and while it is optional for military members, it makes money sense to set aside funds throughout your career to supplement the retirement pay that was never intended to fully financially support you.
In short, the TSP makes sense, and you should have one.
For more information on the TSP, you can check out the Thrift Savings Plan website.
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