The big lie at the heart of the highway bill

Article Highlights

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

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

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

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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.

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About the Author

 

Alan D.
Viard
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
  • Assistant Info

    Name: Regan Kuchan
    Phone: 202-862-5903
    Email: regan.kuchan@aei.org

 

Alex
Brill
  • Alex Brill is a research fellow at the American Enterprise Institute (AEI), where he studies the impact of tax policy on the US economy as well as the fiscal, economic, and political consequences of tax, budget, health care, retirement security, and trade policies. He also works on health care reform, pharmaceutical spending and drug innovation, and unemployment insurance reform. Brill is the author of a pro-growth proposal to reduce the corporate tax rate to 25 percent, and “The Real Tax Burden: More than Dollars and Cents” (2011), coauthored with Alan D. Viard. He has testified numerous times before Congress on tax policy, labor markets and unemployment insurance, Social Security reform, fiscal stimulus, the manufacturing sector, and biologic drug competition.

    Before joining AEI, Brill served as the policy director and chief economist of the House Ways and Means Committee. Previously, he served on the staff of the White House Council of Economic Advisers. He has also served on the staff of the President's Fiscal Commission (Simpson-Bowles) and the Republican Platform Committee (2008).

    Brill has an M.A. in mathematical finance from Boston University and a B.A. in economics from Tufts University.

  • Phone: 202-862-5931
    Email: alex.brill@aei.org
  • Assistant Info

    Name: Brittany Pineros
    Phone: 202-862-5926
    Email: brittany.pineros@aei.org

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