On March 14, the U.S. Senate approved allowing corporate defined benefit pension plans to base their contribution calculations on interest rates over a 25-year average rather than current interest rates, which have sent contribution payments soaring.
Here’s how it works: You let companies set aside less money in their pension plans. When they put less in their pension funds, they report higher profits and pay more in corporate tax. That generates a little extra revenue, which you can put in the highway fund. Over the long run, this policy doesn’t actually generate any added revenue, since in later years, companies will have to increase their pension contributions to make up for what they didn’t set aside today, and their tax payments will go down. But since Congress measures the costs of laws over a 10-year window, the added revenues in the near term count, and revenue losses far in the future don’t.
Pension smoothing is the cornerstone of the House bill to fix the highway fund. The Senate has gone a different way: On Tuesday, March 13 Republican senators joined nearly all Democrats to strip pension smoothing out of the highway bill. They replaced it with provisions that raise real revenue, like making banks report more information about mortgages so it’s harder for people to claim income tax deductions they don’t qualify for. The Committee for a Responsible Federal Budget, an anti-deficit group, calls the Senate-passed bill “gimmick-free” and “the most fiscally responsible option” to keep highway construction funded.
Over the last few years, pension smoothing has been one of Congress’ favorite fiscal tricks, with members proposing it as a way to pay for all sorts of things: Cutting tax rates. Repealing the tax on medical devices in the Affordable Care Act. Shoring up benefits for coal miners. Undoing a set of cuts to military pensions that Congress had passed just weeks earlier. And pension smoothing actually did get used once, in the two-year highway bill that passed in 2012. If the House gets its way in the current fight, we’ll just be extending the underfunding that already happened in the 2012 bill for a few more years.
There’s no real opposition in Congress to pension smoothing, just disagreement about how to spend the money it “generates.” It’s hard to avoid concluding that members of Congress aren’t trying to find ways to spend money without increasing the deficit; instead, they’re trying to find ways to spend money while being able to say they are not increasing the deficit. And that means there is a lot of demand for gimmicks like pension smoothing that appear to generate tax revenue without imposing a real tax increase.
The Federal Highway Trust Fund is Set to Run out of Money
But there are two problems with this justification for pension smoothing. One is that it’s not actually costless. We can let companies pay less for pensions now and more later, but there is a time between now and later. If companies go bankrupt in the interim, their pension funds will be less funded than they should have been. Pensioners will take some losses, but mostly, the unfunded benefits will be insured by a federal government entity called the Pension Benefit Guaranty Corporation. Paying out on that insurance will mean higher fees on companies that don’t go bankrupt.
The other problem is that the hunt for fake pay-fors has made our policy-making process sclerotic. Historically, Congress has passed highway funding bills as five-year authorizations that give state governments the ability to plan capital spending over the medium term. The need to hunt under the couch cushions for change to make the highway bills add up has made five-year bills impossible. That’s why the 2012 highway bill ran for only two years, and why this one provides only enough money to keep the highway fund solvent for 10 months.
The Senate’s bill would cut the solvency period to five months, in hopes that a short deadline would pressure Congress to come up with a permanent funding solution for highways after the November elections, making five-year highway bills possible again. But John Boehner, the House Speaker, is insisting he will be just sending the House bill right back to the Senate, pension smoothing and all. Don’t expect Congress to give up its favorite budgeting gimmick anytime soon.
What does that mean for your company?
Companies need someone on their side to navigate towards the future when the U.S. government is ready to collect on this temporary funding measure. When increased contributions are expected to make up for the money used for today’s higher tax rates used to fund the highway bill, P&B Live’s expert pension actuaries will have prepared you and advised you on the correct measures to save you money and time.