Financial Reform Act Signed into Law

Pres. Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010.  The Act is the most sweeping overhaul of the financial system since the Great Depression.  At over 2,300 pages, many of the provisions won't be understood for years, as various commissioned studies and regulations are completed.  We can be sure that the "law of unintended consequences" will apply to something so vast and unrefined.  For example, the limits to be imposed upon debit card swipe fees charged by banks and other fee limitations could lead to the loss to consumers of no-fee checking accounts and the reduction of benefits associated with the use of credit cards, such as cash back and travel point programs.

The Act is proclaimed to be able to prevent future financial meltdowns for which the American taxpayer will be on the hook, and to protect consumers with the creation of a Bureau of Consumer Financial Protection to be housed in the Federal Reserve.  Nevertheless, regulation of the Fannie Mae and Freddie Mac mortgage companies, which represent the largest exposure for taxpayer bailouts, was left out of this bill, as was the regulation of financing departments of auto dealers which touch the lives of most consumers.

The Act instructs the SEC to conduct a 6-month study of whether to apply a fiduciary standard of care to registered broker-dealers when providing investment advice to consumers.  Presently the fiduciary standard applies to investment advisors but not to broker-dealers.  Broker-dealers only have to recommend investments that are considered "suitable" for their customers.  If the fiduciary standard is extended to brokers, then they will be required to recommend investments that are "in the best interest" of their customers.

The Act also permanently raises the FDIC deposit insurance limit to $250,000 retroactively to January 1, 2008.  Previously the insurance limit was scheduled to drop to $100,000 after 2013.

CBO Report on Social Security

The Congressional Budget Office just released the report, "Social Security Policy Options."  Social Security outlays will exceed annual tax revenues in 2010, which is the first time since the 1983 reform.  The CBO states that if the economy recovers soon, Social Security taxes will again be sufficient to pay current expenses, but only for a few years.  By 2016, annual spending will regularly exceed tax revenues.

The CBO references the so-called Social Security "trust fund," where previous excess taxes were accumulated.  The trust fund is projected to be exhausted in 2039.  The problem, of course, is that there isn't really a trust fund.  Prior excess Social Security taxes went to pay for other government spending by purchasing U.S. Treasury debt obligations.  There is not a cash balance to draw upon as the trust fund misnomer would indicate.  To pay for program benefits in excess of Social Security taxes, the government will need to issue more debt obligations, thus increasing the national debt, or raise taxes in order to fund the redemption of Treasury securities purchased with previous Social Security surpluses.  That is one reason why this issue must be addressed now.  The other major reason is the aging of the American population who will claim benefits.  The options to address the funding shortfall can be basically categorized as lowering Social Security benefits or raising Social Security taxes, or some combination, because there isn't really 29 years worth of money on deposit in a "trust fund."

The CBO report analyzes 30 options.  The CBO proceeds under the assumption that people currently older than 55 will not be affected by any changes.  This cut-off makes it uncomfortable for people like me that are slightly younger than this age!  While the CBO did not make recommendations, options analyzed include the following:

• Increase the payroll tax rate from one to three percentage points
• Remove the upper cap on compensation subject to the payroll tax but do not increase benefits
• Lower benefits for the top 50% or 70% of earners
• Raise the full retirement age to 70
• Reduce the cost-of-living adjustments for benefits

Americans must be prepared to fund more of their retirement needs in the future.  While the Social Security program will continue to be a part of our future, the combination of benefit reductions and higher taxes will increase the need for the public to take more responsibility for their retirement income needs.  Future retirees will need to save more of their earnings for retirement during their working years while being subjected to higher taxes on those earnings.