November 30, 2023

Washington Update: Year-end wrap up and a look ahead to 2024

By Mike Townsend

October in Washington was certainly one for the history books. After narrowly averting a government shutdown at the beginning of the month with a last-minute deal, House Speaker Kevin McCarthy (R-CA) became the first speaker to be ousted from the position. A handful of his Republican colleagues forced a vote on his leadership, in part because he did not push for spending cuts as part of the government shutdown deal. What followed were 22 days of paralysis as House Republicans struggled to pick a new speaker, with three Republican nominees for the post failing to win the minimum 217 votes needed. While this played out, the House was effectively closed for business, with lawmakers unable to debate the issues, vote on legislation or hold hearings. 

Finally, on October 25, the House confirmed Rep. Mike Johnson (R-LA) as the new speaker. Johnson, a low-profile conservative in his fourth term representing the northwestern part of Louisiana, was no one's first choice, but he emerged as the consensus choice of Republicans eager to get the House functioning again.

Now, the spotlight is squarely on the new speaker, who is relatively unknown in Washington and has no experience in this kind of high-profile leadership role. And there won't be any easing into things, as Speaker Johnson was thrust immediately into a series of thorny issues, including another government shutdown deadline and a $106 billion emergency spending proposal from the White House for military aid to Ukraine and Israel, humanitarian aid for civilian victims of those and other conflicts, money for border security and more.

Johnson was able to navigate – at least temporarily – around the latest government shutdown threat. With a shutdown looming on November 17, Johnson crafted a two-tiered extension that will keep 20% of the government open through January 19 and the rest open through February 2. The bill passed the House and the Senate prior to the deadline, averting a shutdown for the second time this fall. But it increases the likelihood that there will be a shutdown in early 2024, as the underlying conflict between the House and Senate remains unresolved.

The ongoing dance around a shutdown is a product of the fact that the House and Senate are not remotely on the same page in their approaches to funding the government. The Democrat-controlled Senate is crafting appropriations bills that use 2023 funding numbers, essentially keeping spending flat from last year. But the Republican-controlled House is aggressively pushing for broad spending cuts and is writing bills using the 2022 funding numbers. That's about $120 billion lower than the Senate's bills. How those differences get resolved is anyone's guess. Expect a difficult fight that may lead to a shutdown in the new year.

The battle over government spending this year is part of a growing debate on Capitol Hill over the federal deficit and the national debt. Rising interest rates mean that the cost of servicing the nation's $33 trillion debt is increasing. Interest payments rose to $659 billion in fiscal year 2023—an 87% increase in just two years. Projections indicate that in three years, interest payments on the debt will become the federal government's second-largest expenditure, behind only Social Security. Expect reducing the federal deficit (now nearly $2 trillion) and the national debt to be a major theme in the 2024 election and beyond.

Retirement bill introduced

October also saw the reintroduction of the "Retirement Savings for Americans Act," a bill that was first introduced last year. The bicameral, bipartisan legislation is led by Senator John Hickenlooper (D-CO) and Senator Thom Tillis (R-NC) in the Senate, while Reps. Lloyd Smucker (R-PA) and Terri Sewall (D-AL) are the leaders of the House version. The bill aims to provide a new retirement savings opportunity for low and middle-income workers who may not have access to an employer-sponsored plan. It would be run by the federal government, similar to the Thrift Savings Plan for federal employees. A government match would be significant incentive to savers. The proposal is controversial. Proponents argue that it would take the burden off small businesses and increase retirement savings among the most vulnerable populations. Opponents say it would be expensive and that it would put the federal government in direct competition with the private sector in the retirement savings arena. The bill seems unlikely to move this year or next in the bitterly divided Congress, but it may foreshadow a longer-term battle over the future of retirement savings.

The bill may also provide a bit of perspective on a question that is top of mind for retirement savings advocates in Washington: Who will be the next retirement champions on Capitol Hill? For nearly 25 years, retirement savings policy has been driven largely by former Senator Rob Portman (R-OH), who retired at the end of the last Congress, and Senator Ben Cardin (D-MD), who earlier this year announced that he would not run for re-election and will retire at the end of next year. While there have been numerous other lawmakers on both sides of the aisle who staunchly supported retirement savings issues, Portman and Cardin were unquestionably the driving forces behind much of the retirement-related legislation over more than two decades. The next year may give us more clues about which legislators are interested in taking up that leadership role on these important issues.

SECURE 2.0 implementation continues

With numerous provisions of the new SECURE 2.0 retirement savings law set to take effect in January, there is growing concern about the slow pace of guidance emerging from the IRS, the Department of Labor and other regulators on key issues. But the IRS did clarify one critical issue. The agency announced that it will delay for two years a provision that requires employees over the age of 50 who earn more than $145,000 to make catch-up contributions to a Roth account. That provision was set to go into effect in 2024 but has now been pushed back to 2026. A coalition of employers, financial services companies and 401(k) plan service providers advocated for the delay, arguing that companies needed more time to set up their systems for the change. The IRS also clarified another point of confusion in SECURE 2.0, where a drafting error appeared to prohibit all catch-up contributions beginning in 2024. The IRS notice indicated that all catch-up contributions for employees age 50 and over could proceed as normal in 2024 and beyond.

Finally, the IRS also recently announced that retirement savers will be able to put $23,000 into a 401(k) in 2024, up $500 from this year. Catch-up contribution limits will remain at an additional $7,500 for employees 50 and over. In addition, the qualified charitable distribution limit will increase for the first time after SECURE 2.0 indexed the limit to inflation. As a result, individuals will be able to roll as much as $105,000 from an IRA directly to a charity in 2024, up from the long-standing limit of $100,000.

DOL Fiduciary Rule: Here we go again.

On October 31, the Department of Labor unveiled its long-awaited proposal to redefine who is a fiduciary in the retirement savings context, which the administration has rebranded the "Retirement Security Rule." The rule is the latest iteration in a nearly 15-year effort by various administrations to update the fiduciary standard. The Obama administration's 2016 rule went briefly into effect before being invalidated by the courts in 2018. The current administration has issued "frequently asked questions" to try to clarify its vision, but even those have seen setbacks when tested in the courts.

The new proposal changes the test for determining whether an individual is a fiduciary and would make one-time rollover advice fall under the fiduciary definition, as well as recommendations involving annuities. The administration framed the proposal under a broader effort to reduce "junk fees" in various consumer relationships, calling retirement advice that is not in a client's best interest a "hidden cost to their lifetime savings." 

The proposal is now in a 60-day public comment period, with comments due January 2, 2024. Given the controversy that has surrounded this issue for more than a decade, expect the details of the proposal to be carefully reviewed and vigorously debated in the months ahead.

Looking Ahead

Of course, the focus in 2024 will be on the presidential election and the Congressional elections that will determine control of the House and Senate. All signs are pointing to a presidential rematch between President Biden and former President Trump, though there will undoubtedly be twists and turns in the road to get there. Also crucial will be the battle for control in Congress. In the Senate, Republicans have a big advantage, with 23 Democrat-held seats up for re-election versus just 11 Republican-held seats. Republicans need to flip just two seats to regain the majority and are favored to do so. In the House, where all 435 seats are on the ballot every two years, Democrats need to net just five seats to capture the majority. They have a good chance at succeeding. That could mean a split Congress again in 2025 – but split in the opposite direction. If that happens, it would be a first: the House and Senate have never flipped in opposite directions in the same election. Expect a crazy year that is heavy on political drama and light on substantive legislation.