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Podcast #23: Debt Ceiling and Secure Act 2.0

January 25, 2023

Listen to the podcast below to hear Jill talk about

  • Debt Ceiling
  • Secure Act 2.0
  • Jill’s Good News Segment

 

 

Script:

Happy New Year Everyone,

I hope we all have a healthy and peaceful 2023.

There are many things in the world to worry about. You can choose inflation, rising interest rates, possible recession, war in Ukraine, lingering COVID impact and now we can add the Debt Ceiling.

Article 1 Section 8 of the constitution required Congress to authorize debt by issue. However, Congress in the Second Liberty Act of 1917, modified its meaning to aggregate the debt. Hence, we have a debt ceiling or debt limit if you prefer.

When the government borrows money to pay its bills selling U.S. Treasury securities, a tally is made of the debt issued which continues until it reaches the debt limit voted on by Congress. We reached that date on January 19.

What’s happening now? Treasury Secretary Janet Yellen is taking what is called extraordinary measures to continue to pay our bills. The government is required to invest cash received in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. Instead, Yellen is holding the cash in order to pay U.S. bills. However, the estimate is the cash will run out early June.

If Congress doesn’t raise the debt ceiling by the time we run out of money, we would default on our loans. The Treasury would be unable to pay its employees, Social Security and Medicare benefits, military salaries and so on.

The U.S. credit rating would be downgraded. With a lower credit rating, interest rates rise which could impact consumer loans. Standard & Poor rates the U.S. as AA+. Until 2011, we had been considered AAA which is the highest rating. In 2011, John Boehner demanded cuts in the budget from Obama. Previously, in 1995, Newt Gingrich used the debt ceiling vote to get the Clinton administration to reduce spending.

The debt issue goes beyond our borders. As Jeff Sommer from the NY Times wrote, “Virtually all financial assets on the planet are priced in relation to Treasuries. The entire financial world would suddenly become much riskier.” If we are downgraded, it will domino throughout the world economy.

The Republicans under Kevin McCarthy want cuts in many programs including Social Security and Medicare. What is galling is the debt as a percent of GDP is actually down. According to a press release from the Treasury October 2022, the deficit was down to 5.5% of GDP compared to 12.8% in FY 2021. It rose during the pandemic when the government sent money to the public to help them through the crisis. The payments are finished so that debt is not re-occurring.

The longer it takes to resolve this stand-off, the more likely the financial markets will be volatile. Bank of America analysts wrote to clients stating they believe a default in late summer or early fall is likely. Goldman Sachs wrote the risk the U.S. can’t pay its bills is greater than in 2011.

William Dudley, former president of the New York Fed said, “You can’t put Humpty Dumpty back together again if you default on the debt.”

In the past, such as 1995 and 2011, the market declined but recovered. We don’t know how this will end. We are not altering portfolios at this time but just in case, we do suggest you keep enough cash to cover your expenses over 9 – 12 months. Please let us know if you need cash.

I’d like to discuss some aspects of the Secure Act 2.0 passed in late 2022. You’ll recall that in the Secure Act 1.0 it raised the minimum age you must withdraw from your IRA from 70-1/2 to 72. With 2.0 the age has been raised again. For those born in 1950 or earlier, no change. However, if you were born between 1951 and 1958, your required minimum date or RMD for short increases to age 73. If you’re born after 1959 or later, the RMD starts at 75. It’s not that you can’t take money out earlier, it is just that you must start withdrawals at the RMD age or incur a significant penalty.

For those of you still saving for retirement, there is some good news. Regular IRA contributions and the catch-up provision if you are over 50 will be indexed to inflation.

There is a product called a QLAC which stands for Qualified Longevity Annuity Contract.                                                                                                                              The concept is that you can take an amount out of your IRA and buy a QLAC. At age 85, you will receive a monthly payment for life. The gamble, of course, is that you live to age 85 to start collecting. Some like it because you are moving money out of your IRA so it reduces your required minimum distribution until you reach 85. The amount you are allowed to withdraw was $145,000 but with Secure 2.0, you may now move $200,000. If you’d like to discuss QLACs, please give me a call.

529 plans are education savings accounts. Starting in 2024, if there are excesses, it can be rolled into a Roth IRA. There are limitations on this but still, a nice feature if the plan is over-funded.

Now for some good news.

We all know pesticides for agriculture are unhealthy. Studies are showing that ants can be more effective than chemicals. Scientists in Brazil and Spain reviewed 50 studies across many countries to substantiate ants were as good if not better the pesticides.

It’s not unusual to picture a robot inside a factory handling such tasks as putting cars together. However, the utilization of robotics covers multiple economic sectors. In farming, what’s called a scouting robot named the SentiV, behaves like tumbleweed inspecting 50 acres of crops to look for disease, pests and so on. While still a prototype, it will permit farmers to save on pesticides and fertilizers while isolating plants that may need special attention. Imagine the time saving not to having to inspect every plant – or having a drone fly over the crops but can’t see underneath the leaves. Pretty cool.

That’s it for now. Please don’t hesitate to contact us if you would like to chat.

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