The big lie at the heart of the highway bill

Article Highlights

  • Senate-passed highway bill takes a big step backward on pension policy

    Tweet This

  • Senate highway bill is being marketed as a job creation measure, a claim that's little more than economic nonsense

    Tweet This

  • Senate bill gives employers a pass on some of obligations by allowing them to ignore current interest rates

    Tweet This

The Senate-passed highway bill takes a big step backward on pension policy by adopting a provision that allows employers to shirk some of their pension plan contribution obligations. This provision is being marketed as a job creation measure, a claim that's little more than economic nonsense. In reality, this provision increases the risk of taxpayer-funded bailouts while serving as a budget gimmick to help Congress fund transportation spending.

Many employers are complaining to Congress that current pension funding rules are too onerous in today's economic climate. There's a good economic reason, though, why firms need to be making larger pension contributions. Today's low interest rates mean that contributions compound slowly. So, employers need to put in more money to make sure that future obligations to employees can be met.
Employers eager to opt out of their pension obligations have teamed up with a Senate that's willing to play budget games to fund transportation spending.
The Senate bill gives employers a pass on some of these obligations by allowing them to ignore current interest rates when they calculate their funding obligations and instead pretend that rates are close to their 25-year historical average. These higher assumed interest rates mean smaller pension contributions and happier firms.

But, the promises made by pension plans don't go away just because firms don't fund them. If a pension plan can't meet its obligations, a federal agency called the Pension Benefit Guaranty Corporation (PBGC) takes over the failed plan, paying the workers the benefits that firms promised but couldn't pay. If the PBGC can't get the necessary money from the fees it charges and the assets it holds, it will have to turn to the taxpayers.

These risks are all too real. The 100 largest plans were roughly $200 billion underfunded at the end of last year. And, the PBGC already faces a $26 billion gap between the assets it holds and its liabilities from past pension failures.

Employers often argue that easing up on pension funding requirements stimulates the economy and spurs job creation. They claim that, if they put less money into their pension funds, they will have more money to invest back into their businesses. In reality, though, pension contributions don't take money away from business investment. While a particular firm's pension contributions can't be used for the firm's own investment, they become part of the pool of savings that finances investment throughout the economy.

Employers also argue that they need year-to-year predictability for their required pension contributions. To some extent, that's a fair point. If firms had to make up their funding shortfall overnight every time interest rates or stock prices drop, they would have a lot of trouble laying their hands on the money quickly enough. But, the funding rules already accommodate these concerns by giving pension plans seven years to make up any shortfall. The Senate bill would allow firms to further delay paying for the promises they've made.

The Senate ignored the economic case against pension funding relief because of myopic budgetary maneuvering. On paper, pension funding relief is a revenue raiser. Because firms get a tax deduction for the money they put into their pension funds, they pay more taxes if they put less money into the funds. As a result, the provision in the Senate bill is supposed to bring in $18 billion of tax revenue over the next seven years. The bill uses part of this additional revenue to finance roads, bridges, and public transportation.

Unfortunately, the Senate is being just as short-sighted as the employers. While reduced pension contributions mean more taxes today, what happens down the road? For the pension plans to stay afloat, the firms will have to put in extra money in the future, to make up for their stinginess today. When they deduct those extra contributions, tax revenue will go down. At best, the $18 billion is a timing gimmick, not a true revenue gain. At worst, firms won't put in extra money tomorrow and some funds will go under, potentially forcing the PBGC to tap the federal treasury.

There's nothing secret about these timing effects. The Congressional scorekeeper reports that the provision loses $9 billion in the last three years of the budget window. There are no official projections further out, but it's easy to see that the revenue gain is temporary.

Employers eager to opt out of their pension obligations have teamed up with a Senate that's willing to play budget games to fund transportation spending. The result is bad pension policy and bad tax policy. We hope that the House rejects this policy and takes a more honest approach to funding the highway bill.

Alex Brill is a research fellow at the American Enterprise Institute and previously served as chief economist to the House Ways and Means Committee. Alan D. Viard is a resident scholar at AEI and previously served as a senior economist at the Federal Reserve Bank of Dallas.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alan D.
Viard

 

Alex
Brill

What's new on AEI

Retirement crisis is hyped
image Why the Foley beheading will force Obama to continue US airstrikes
image How the New York Times misguides their readers on Internet regulation
image US still has time to stake out a position of strength on Ukraine
AEI on Facebook
Events Calendar
  • 18
    MON
  • 19
    TUE
  • 20
    WED
  • 21
    THU
  • 22
    FRI
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.