We the people have come to expect smooth moves from our lawgivers, creatures who are by and large adept at putting short-term patches on long-term problems.
Congress has done its bipartisan best to live up to those expectations in its efforts to prevent the highway trust fund from going bust in coming weeks, a calamity that would put as many as 700,000 construction jobs at risk and delay 112,000 road and 5,600 transit projects.
To postpone the day of reckoning until next May, Congress is relying largely on an accounting gimmick related to pension plan funding. Less elegant thinkers would say a simple, more straightforward solution would be to raise the federal gas tax, stuck at 18.4 cents per gallon since 1993 when a gallon of gas cost about $1.10, according to the U.S. Energy Information Administration.
Instead, Congress is relying on “pension smoothing.” It’s not the first time pension funding rules have been considered a solution to a completely unrelated problem. Earlier this year, the Senate pondered smoothing as a way to extend federal long-term unemployment benefits. Last year, Congress thought it had potential to raise enough tax revenue to justify repealing a medical device tax.
Less creative minds were not impressed.
“The proposal to ‘smooth’ pension contributions would merely shift tax revenue from the future into the present while destabilizing pensions even further and increasing risks of a taxpayer pension bailout,” the Heritage Foundation’s Romina Boccia wrote in February when the unemployment benefit proposal was being circulated.
Here’s a primer on how smoothing works, courtesy of Alan Cole of the Tax Foundation.
Smoothing affects the way pension funds value their liabilities, the benefits they are obligated to pay to retirees and their beneficiaries. The current value of those future obligations is based on a discount rate, which is determined by current interest rates. As Mr. Cole explains at www.taxfoundation.org/blog, if the future value of a pension benefit is $1, using a 4 percent discount rate puts the current value of the benefit at 96 cents. Using a 6 percent discount rate values it at 94 cents.
In other words, the higher the discount rate, the lower the current value of a pension fund’s obligations. The lower those obligations are, the less money a company has to contribute to its pension fund to comply with federal pension funding rules.
Interest rates have remained stubbornly low — forcing companies to contribute more to their pension funds. While that should make the funds better funded and put current and future retirees at ease, it crimps federal tax revenue. That’s because pension fund contributions are tax deductible. The more a company contributes to its pension fund, the less it contributes to the IRS.
Lawmakers who grasp that concept figure they can kill two birds with one stone: give pension funds relief from low interest rates and boost federal highway funding. They want to “smooth” the impact of lower interest rates by allowing companies to use a higher discount rate. That would lower companies’s pension funding requirements but raise their tax bills. The extra tax revenue would pay for transportation projects.
“The extra flexibility is always good from a [pension plan] sponsor’s point of view, but this doesn’t have anything to do with highway funding,” said Arthur Noonan, senior partner in the Pittsburgh office of Mercer, a benefits consultant.
“Can we have a more thoughtful, pragmatic discussion about retirement planning?” he said.
Apparently, now is not the time.
Mr. Cole calls the proposal “a particularly poor policy idea” that is not “being used with the best interests of pensioners in mind.” He said it violates the principal that the people who use the highway system should pay for it.
“There is no meaningful way that pension policy should be tied to highway policy,” he wrote in a blog post Tuesday.
Labor leader Terry O’Sullivan was grateful that Congress appears ready to avert a collapse of the highway funding system. But the president of the Laborers’ International Union of North America was not impressed with how lawmakers are going about their business.
“Lawmakers have no excuses for abdicating their responsibility to pass a long-term, full-investment bill,” Mr. O’Sullivan said in a statement.
While some in Congress have “the courage and conviction to address the need for long-term investment in America’s crumbling infrastructure, too many in both chambers cower at the thought of taking a vote that will actually move our nation forward,” he said.
Most would consider such a vote a smooth move. But when it comes to smooth, Congress is working with a different dictionary than the rest of us.
Len Boselovic: 412-263-1941 or email@example.com