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Government Shutdown & Debt Ceiling.

Q: How does a government shutdown actually work?

A: When you hear “government shutdown”, remember that mandatory spending programs will continue. We will still have a ready military, the legislature will still meet, and Social Security checks will still go out.

Some aspects of the federal budget are considered discretionary, however, and different departments within the federal government will make their own shutdown plans. In 2018-19, the Food and Drug Administration delayed site inspections for drinking water and chemical facilities. Some national parks remained open although basic services in the parks were left unattended. TSA agents at airports worked for weeks on end without pay. (These agents eventually received backpay for the time that they worked, but this did lead to some uncertainty regarding air travel).

Q: How do these shutdowns affect my investments?

A: The don’t necessarily directly affect them, although market uncertainties relating to the shutdown might cause your balances to bounce around a bit. The exception to this would be if you hold a lot of federal government debt, such as bonds, T-Bills or other instruments. We’ll look at this more closely in a question below.

Q: What about my Social Security check?

A: Recipients should still get their checks, as this is part of the “mandatory spending” we discussed above. Longer term, younger investors should pay attention to what these budget crunches in D.C. do to the Social Security Trust Fund, which is scheduled to run out of money in 2033 at the time of this writing. This is a bigger deal that we will examine on other posts and podcasts. But short term shutdowns don’t generally affect the current payouts of Social Security.

Q: If the debt ceiling issue isn’t resolved by October 18th, how is this going to harm my Social Security and other investments? Is there anything I can do to prepare for this?

A: First it’s helpful to know what the debt ceiling is and how it works. Imagine if you earned $9,000 each month and spent $10,000. You’re going into debt more by the minute, but every time you hit the limit on one credit card, you take out another. Then you begin to spend $10,500 every month, because you have to keep paying interest on the first credit card. Next year, you’re spending $12,000 every month because you’re keeping up with the Joneses and paying interest only on two credit cards and pretty soon…you get the picture. Not sustainable. This is a picture of what the Federal Government is dealing with on a larger scale.

There are two ways the government can solve the debt ceiling issue. First, spend less. Anyone know of enough politicians willing to spend less? Seeing no hands raised in D.C., we move on to #2: borrow more. This leads us to the debt ceiling issue. We as a country told ourselves that we would not borrow more than the “ceiling” allows. That said, both parties have voted to raise the debt ceiling more than once per year since its inception. So it’s not really treated as a limit. Every time this issue comes up, the party in power tends to do the government equivalent of taking out a new credit card.

Now to the question of how to respond. This trajectory will ultimately affect not just Social Security payments but all federal spending, and it stands to be a serious issue in the next decade, given our current pace. So we frequently tell folks to build a financial plan that does not rely on Social Security too heavily for it to work. If you have a plan that works at full Social Security payout but tanks when benefits are cut, you don’t have a great plan – go back to the drawing board. You should also question what role federal debt instruments play in your investments. Without going into detail here because this isn’t investment advice, this is a topic we will continue to look at in our planning meetings.

Q: How do financial advisors plan amidst these issues to help keep my money and retirement accounts relatively safe?

A: Have you ever seen the T-Shirt, “It’s simple, not easy”? That about sums it up. It’s simple (but not easy) to plan for these interruptions. The simple three step process is 1) make a plan, 2) throw rocks at the plan to see if anything breaks it, 3) fix anything that broke when you threw the rocks. One of our favorite “rocks” to throw at your plan is the “Oh-no-Social-Security-is-bankrupt” rocks. But you can run your financial plan against all kinds of contingencies, and we recommend doing that together.

We can’t guarantee anything in the market. But in the words of Morgan Housel, the purpose of a good margin of safety is “to render all forecasts irrelevant.” We like to create plans with built-in margins of safety, so that you don’t have to worry about inept governments or any other potential obstacle to your success.

Any opinions are those of Tim Weddle and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

U.S. government bonds and Treasury bills are guaranteed by the U.S. government, and if held to maturity, offer a fixed rated of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.


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