Why is This Topic Important to Wealth Managers? This blogticle discusses the debt limit debate. We present discussion directly from the Administration including the Department of the Treasury. Wealth managers who are following the debt debate discussion will likely be interested in our presentation of insider comments.

As almost the entire world knows at this point, the U.S. reached the debt limit on May 16, 2011. To plug the gap, the Treasury Department has employed three measures to temporarily extend our ability to meet the nation’s obligations.  Those measures, in order taken, are (1) suspending issuance of State and Local Government Series (SLGS) Treasury securities; (2) declaring a “debt issuance suspension period” of the Civil Service Retirement and Disability Fund (CSRDF); and (3) suspending reinvestment of the Government Securities Investment Fund (G Fund).

It is said that these four extraordinary measures allow the Treasury to extend borrowing authority until August 2, 2011. Here’s what Treasury has said about the debt limit over the past few weeks:

7/12 Mary Miller, Assistant Secretary for Financial Markets at the U.S. Department of the Treasury, issued the following statement reaffirming the projected date on which the United States will exhaust borrowing authority under the statutory debt limit.

“The Treasury Department continues to project that the United States will exhaust its borrowing authority under the debt limit on August 2, 2011.  Secretary Geithner urges Congress to avoid the catastrophic economic and market consequences of a default crisis by raising the statutory debt limit in a timely manner.”

7/13 Treasury Secretary Tim Geithner made a brief statement to the press:

There is unanimity in that room that we are a country that meets its obligation, we are a country that pays our bills and that we’ll act and do what’s necessary to make sure that we can maintain that commitment. As the Majority Leader said, we have looked at all available options and we have no way to give Congress more time to solve this problem and we are running out of time.

And the eyes of the country are on us, and the eyes of the world are on us and we need to make sure we stand together and send a definitive signal that we are going to take the steps necessary to avoid default and also take advantage of this opportunity to make some progress in dealing with our long-term fiscal problems. We don’t have much time; it’s time we move.

7/14 The U.S. Department of the Treasury released the following statement from Under Secretary for Domestic Finance Jeffrey Goldstein on the Standard and Poor’s (S&P) downgrade:

“[This} action by S&P restates what the Obama Administration has said for some time: that Congress must act expeditiously to avoid defaulting on the country's obligations and to enact a credible deficit reduction plan that commands bipartisan support.”​

7/15 U.S. Department of the Treasury releases the following statement from Jeffrey Goldstein, Under Secretary for Domestic Finance, regarding the use of the last of the previously mentioned measures available to keep our nation under the statutory debt limit, suspension of reinvestment of the Exchange Stabilization Fund.

“Today, as previously announced, the Treasury Department will suspend reinvestment of the Exchange Stabilization Fund, the last of the measures available to keep the nation under the statutory debt limit.  In order to prevent a default on the nation’s obligations, Congress must enact a timely increase of the debt ceiling.”

Finally, to quote President Obama from his address earlier this week:

“[American workers] are fed up with a town where compromise has become a dirty word.  They work all day long, many of them scraping by, just to put food on the table.  And when these Americans come home at night, bone-tired, and turn on the news, all they see is the same partisan three-ring circus here in Washington.  They see leaders who can’t seem to come together and do what it takes to make life just a little bit better for ordinary Americans.  They’re offended by that.  And they should be.”

Tomorrow’s blogticle would ideally present the terms of the debt agreement, but if not, we’ll discuss life insurance.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

Treasury Secretary Tim Geithner insists that the administration needs to reach a debt limit deal by the end of this week to give Congress enough time to enact the deal into law. Without a deal, the federal government will be unable to pay its debts as of August 2 of this year.

“Default is not an option,” he said on Tuesday, July 12, at the Treasury’s Women in Finance Symposium. “Failure is not an option, and they understand that—Speaker [John] Boehner and Minority Leader [Mitch] McConnell—absolutely understand we need to move in advance of the deadline on Aug. 2nd.”

But despite Geithner’s confidence that a deal will be reached, President Obama and Congressional leaders are also working on options for keeping the government’s bills paid if a deal can’t be reached by the Treasury’s August 2 debt limit deadline. “If we are unable to come together, we think it’s extremely important that the country reassure the markets that default is not an option and reassure Social Security recipients and families of military veterans that default is not an option,” said Mitch McConnell (R-K.Y.), who took part in the talks.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage in  Advisor’s Journal, see Democrats Call Debt Limit Unconstitutional (CC 11-134), Debt Limit Standoff Boils Over (CC 11-115) and Storm Clouds over U.S. Debt (CC 11-85).

The August 2 drop-dead date for the debt-ceiling is rapidly approaching, but Congress isn’t phased enough to set aside partisan bickering and solve the Fed’s funding woes.

In a stand against Democratic reticence over deep spending cuts, the Republican-dominated U.S. House of Representatives voted on May 31 to reject a bill that would have raised the debt ceiling. Republicans look to be using the debt ceiling fight to press the President and Congressional Democrats on spending issues.

The administration initially said that the debt-ceiling would be reached on May 16. But when that date passed, Treasury Secretary Timothy Geithner announced that the date could be extended through August 2 using accounting gimmicks and by letting bills go unpaid—for instance, ceasing investments in two government pension plans. The White House has also proposed selling 14,000 pieces of unused federal property to help cut the deficit.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of U.S. debt in Advisor’s Journal, see Debt Ceiling Approaching: Prepare for Impact (CC 11-100) & Storm Clouds over U.S. Debt (CC 11-85).

Why is this Topic Important to Wealth Managers? The subject presented today provides wealth managers with valuable information to provide to clients interested in self-funding their retirement. The current projections of the Social Security and Medicare programs actually opens the door to present annuities and other insurance products as one means to that end. Astute wealth managers will realize this opportunity.

Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. The 2011 report was recently released.

The 2011 report shows the financial conditions of the Social Security and Medicare programs are far from great. Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and would require program modifications if disruptive consequences for beneficiaries and taxpayers are to be avoided.

Both Social Security and Medicare, the two largest federal programs, face substantial cost growth in the upcoming decades due to factors that include population aging as well as the growth in expenditures per beneficiary. Through the mid-2030s, due to the large baby-boom generation entering retirement and lower-birth-rate generations entering employment, population aging is the largest single factor contributing to cost growth in the two programs.

In only 25 years by 2036, one year earlier than was projected in last year’s report, the Social Security Trust Fund will have completely exhausted its assets and projected incoming revenues will be insufficient to maintain payment of full benefits. In only 13 years, by 2024, Medicare’s Hospital Insurance Trust Fund is projected to exhaust its assets, five years earlier than was projected in last year’s report.

Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The fund experienced a $49 billion deficit last year (excluding interest income) and $46 billion is the projected deficit in 2011. This deficit is expected in the long run to increase as the retirement of the baby boom generation swells the beneficiary population.  It is projected that tax and interest income will be sufficient to pay benefits through 2022, after which the Trust Fund will be drawn down until depleted in 2036.

Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable wages will grow rapidly from 11-1/2 percent in 2007, to roughly 17 percent in 2035. Costs display a slightly different pattern when expressed as a share of GDP. Program costs equaled roughly 4.2 percent of GDP in 2007, and are also projected to increase around 50% to 6.2 percent of GDP in 2035.

The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 2.22 percent of taxable payroll, up from 1.92 percent projected in last year’s report. This deficit amounts to 17 percent of tax receipts, and 14 percent of program outlays.

Relative to Social Security’s combined Trust Funds, Medicare’s Hospital Insurance (HI) Trust Fund faces a more immediate funding shortfall. HI has run cash deficits since 2008 and under current projections will continue to do so until Trust Fund assets are exhausted in 2024, at which time dedicated revenues would be sufficient to pay 90 percent of HI costs. The share of HI expenditures that can be financed with HI dedicated revenues is nevertheless projected to decline slowly to 75 percent in 2045.

Finally, Medicare costs are projected to grow substantially from approximately 3.6 percent of GDP in 2010 to 5.5 percent of GDP by 2035.

As was mentioned earlier, the shortfall of federal funds available for retirement has presented a compelling reason to provide clients with annuity and other retirement products.

Tomorrow blogticle will continue to address issues surrounding the private wealth management practice.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? This blogticle presents discussion related to the State Small Business Credit which is now being applied for by an increasing number of states. The program is intended to provide capital to small businesses. Wealth managers with small business clients in these states should be mindful of the potential access to new capital.

Late last month the U.S. Department of the Treasury announced the approval of State Small Business Credit Initiative (SSBCI) applications from Connecticut, Missouri, and Vermont. The planned use of SSBCI funds by these states is intended to help create new jobs and is expected to spur more than $534 million in additional small business lending. The SSBCI program, which supports state-level small business lending programs, is one component of the Small Business Jobs Act.

On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (the “Act”).[1] The Act created the SSBCI, which was funded with $1.5 billion to strengthen state programs that support lending to small businesses and small manufacturers. In total, the SSBCI is expected to help spur up to $15 billion in lending to small businesses.

Under the SSBCI, participating states will use the federal funds for programs that leverage private lending to help finance small businesses and manufacturers that are creditworthy, but are not getting the loans they need to expand and create jobs. The SSBCI will allow states to build on successful models for state small business programs, including collateral support programs, Capital Access Programs (CAPs) and loan guarantee programs.  Existing and new state programs are eligible for support under the SSBCI.

“These critical funds will help small businesses access the capital they need to expand their operations, create new jobs, and continue supporting our nation’s economic recovery,” said Treasury Secretary Tim Geithner. “Public-private lending partnerships, such as the State Small Business Credit Initiative, have a proven track record of success, and I’m pleased that this funding is on its way to support economic growth in these states.”

Under the SSBCI, all states are offered the opportunity to apply for federal funds for state-run programs that partner with private lenders to increase the amount of credit available to small businesses. States must demonstrate a reasonable expectation that a minimum of $10 in new private lending will result from every $1 in federal funding. Accordingly, the $1.5 billion federal funding commitment for this program overall is expected to result in at least $15 billion in additional private lending nationwide.

Details on the applications approved earlier in March, which the states expect will generate a cumulative total of at least $534 million in new small business lending in Connecticut ($133 million), Missouri ($269 million), and Vermont ($132 million).

The Treasury has previously approved funding for SSBCI programs in California, Michigan, and North Carolina. Additional applications are expected to be approved in the coming weeks.

Next week’s blogticles will contain helpful tips for wealth managers.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

Treasury Secretary Timothy Geithner sparked outrage when he suggested at a recent House Ways and Means subcommittee meeting that “Congress has to revisit this basic question about whether it makes sense for us as a country to allow certain businesses to choose whether they’re treated as corporations for tax purposes or not.” Geithner’s comments about pass-through entities forced a collective gasp from millions of small business owners who could lose their ability to compete if subject to a double tax regime.   Behind client referrals, professional referrals were the second biggest producer.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous Advisor’s Journal coverage of the Obama administration’s budget and tax proposals, see Obama Budget Would Undercut Utility of Life Insurance in Small Business Planning (CC-11-41) & Obama Tax Compromise Provides 100 Percent Bonus Depreciation of Business Assets Through 2011 (CC 11-01).

For in-depth analysis of S corporation taxation, see Advisor’s Main Library: B—Corporation’s Election Under Subchapter S.