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Suspending the debt ceiling: A breakthrough bipartisan accomplishment

Submitted by Brian.Lavelle on September 17, 2019
RIA Washington Watch

RIA Washington Watch features the insight and analysis of Michael Townsend regarding issues and topics that affect Registered Investment Advisors (RIAs), their clients, and the industry

Michael Townsend

New budget deal: The bill will affect spending, the budget deficit, and national debt—but what about the market?
Retirement savings legislation: The SECURE Act is stuck in the Senate with provisions that will likely affect estate planning strategies if passed.
Regulation Best Interest: The SEC launches a campaign to help investors understand the differences between types of financial professionals.

The ongoing trade standoff with China, monetary policy moves by the Federal Reserve, and the inversion of the yield curve have made it a volatile summer for the markets. That has raised anxiety among investors. However, recent weeks in Washington have been relatively calm. With Congress now back in session after a six-week break, a busy agenda lies ahead.

Here's a status report on several key issues for the markets, investors, and Registered Investment Advisors (RIAs):

Deal on budget, debt ceiling gives markets some certainty

Moments of bipartisanship have been fleeting during this session of Congress, but an important one took place over the summer when Congress agreed to a two-year budget deal that suspends the debt ceiling. President Trump signed the package into law on August 2. The new deal sets federal spending limits for FY 2020, which begins October 1, 2019, and FY 2021. Congress still must pass the 12 appropriations bills that divide those dollars among every federal program and agency in each of the two years. As September began, lawmakers were working hard to complete this year's appropriations process before the October 1 deadline. Failure to do so could result in a partial government shutdown, though Congress seems likely to pass a temporary extension of the deadline if necessary to avoid the second partial shutdown of the year.

Importantly for the markets, the bill also suspends the debt ceiling through July 31, 2021. As has happened frequently in recent years, once the debt ceiling returns, the Treasury Department can employ "extraordinary measures" to ensure that the United States does not default on its debts for several months. This means that the next Congress is likely to have until late 2021 before having to address the debt ceiling again. The action provided some needed clarity to the markets after Treasury Secretary Steven Mnuchin said in July that the Treasury might run out of cash to pay its bills by early September unless Congress acted to raise or suspend the debt limit.

While the deal represents a breakthrough bipartisan accomplishment during this bitterly partisan Congressional session, detractors point out that it increases both the budget deficit and the national debt. The budget deal will increase federal spending over the next two years, with a 3% hike for defense spending next year and a 4% increase for discretionary spending. Combined with the fact that the new law eliminates the automatic, across-the-board spending cuts scheduled to go into effect on January 1, these increases will continue to exacerbate the rising budget deficit. And the agreement to suspend the debt ceiling allows Congress to continue accumulating debt. When the debt ceiling returns in 2021, the national debt is estimated to exceed $25 trillion.

For RIAs and their clients, it's important to remember: Debt ceiling fights tend to increase market volatility, but markets have been relatively sanguine about government shutdowns in the past. In fact, during the 35-day partial government shutdown that began just before last Christmas and lasted into late January 2019, the S&P 500 actually increased by more than 10%, though that move had little to do with the shutdown itself. With the debt ceiling fight kicked down the road by more than two years, it won't be a concern for the markets.

Retirement savings bill still in limbo

As happens with so many things these days, retirement savings legislation is bogged down in the Senate. The House of Representatives approved the Setting Every Community Up for Retirement Enhancement (SECURE) Act in May by an overwhelming 417–3 vote. There was real optimism that the bill might pass the Senate easily, but it wasn't to be. Attempts were made in May and early June to have the Senate approve the House-passed bill and send it directly to President Trump for his signature. However, under Senate rules, any Senator may place a hold on a bill to prevent that from happening. Reportedly, at least three Senators have placed holds on the retirement bill. Attempts have been made to resolve these Senators' specific concerns, but so far the bill remains tied up.

In addition, the House-passed legislation would increase the age at which individuals must begin taking required minimum distributions from 70½ to 72, repeal the age limit that prevents individuals from continuing to make contributions to a traditional IRA after age 70½, make part-time workers who have worked at least 500 hours in three consecutive years eligible to participate in their employer's retirement savings plan, and require lifetime income disclosures to help individuals understand how their current savings would translate into a monthly income in retirement. The bill also contains a number of provisions designed to make it easier for small businesses to offer a retirement savings option to their employees.

Many RIAs have expressed concern about the bill's provision that would change the rules for inherited retirement accounts, often known as "stretch IRAs." Under the legislation, inherited retirement account assets would have to be distributed within 10 years. Current law allows heirs to spread out those distributions over their lifetimes. This change was included in the bill because it raises revenue for the Treasury by offsetting the losses from other provisions, such as the change in the required minimum distribution age. RIAs should continue to monitor developments, as final passage of the provision could have a significant impact on estate planning strategies.

There is no timeline for when the bill might be considered in the Senate, nor is it clear whether the Senate might amend the legislation. If the Senate does make changes, the differences between the two bills must be resolved in a conference with the House, after which both chambers would need to pass identical legislation before it could be sent to the president. Proponents on Capitol Hill remain cautiously optimistic that the bill can be approved this fall.

Administration divided on proposal to index capital gains

One Washington idea that continues to attract media attention—and the interest of RIAs and investors—is the possibility of indexing of capital gains to inflation. This move would effectively lower the tax rate on capital gains by exempting from taxes any gains that are attributable to inflation. Individuals with long-held positions would benefit the most, as the change would increase their basis and thus reduce the taxable gains. The administration has been discussing the concept for more than a year, but internal divisions about whether the administration has the legal standing to bypass Congress have held up movement. The Treasury Department studied the issue last year and is reportedly divided about the legality. Oregon Senator Ron Wyden, the top Democrat on the Senate Finance Committee, said in June that indexing capital gains via an executive order would be "plainly illegal."

Still, we know the president and many in the administration are eager to make this tax change, which would almost certainly trigger a court battle and tie up the initiative for many months. The key question for the administration seems to be whether it feels it could prevail in a protracted legal fight. So far, the administration has declined to test the waters.

Advisors or brokers? SEC steps in with education

Following the Securities and Exchange Commission's approval in June of Regulation Best Interest, which creates a new standard for broker-dealers offering investment advice, the agency has begun a campaign to help investors understand the differences between types of financial professionals. In August, the agency posted a series of five videos on its Investor.gov website. Chairman Jay Clayton speaks directly to the camera in the videos, which include such topics as, the difference between advisors and brokers, how advisors and brokers are paid, and how to determine whether an advisor or broker is the right fit for you.

The videos come as the agency has taken hits from consumer groups that the new Best Interest standard for brokers has only added to the confusion, since it is not the fiduciary duty that has long been the standard for RIAs. The agency is reportedly planning more outreach activities to help investors understand the differences between various financial professionals in the run-up to Regulation Best Interest going into effect June 30, 2020.

This report is current as of September 12, 2019. Look for a future RIA Washington Watch from Schwab's D.C. insider Michael Townsend. And for more insights from Mike, follow him on Twitter: @MikeTownsendCS.

If you're thinking about becoming an independent advisor, consider a custodian that invests in your success. Contact us to learn more about the benefits of a custodial relationship with Schwab.

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