After months of haggling—and months of suffering by the long-term unemployed—the Senate is finally set to pass a bill Thursday afternoon that will reauthorize benefits for Americans who have been out of work for longer than six months.
Republicans have demanded the cost of the extension be offset, and legislators have devised a pay-for known as “pension-smoothing,” which tweaks the formula employers use to fund their pension plans. But some analysts have raised concerns that this seemingly benign formula change could also endanger the solvency of single-employer pensions, particularly those that are already on shaky ground.
In short, the provision will allow companies to contribute less to their pension plans in the short- and medium-term. This raises federal tax revenue in the near-term because employer pension contributions are tax-deductible. While there are some convincing reasons to do this, it’s possible Congress is assuming too much about the health of corporate pensions and allowing some underfunding that could come back to bite both workers and taxpayers in the years ahead.
The detailed reasons are complicated, but important. Federal rules dictate certain levels at which employers must fund their pension plans to ensure that workers still get their promised retirements even if the company runs into financial trouble. The formula is predicated on interest rates, because they determine how much the pension fund will yield.
Low interest rates naturally mean pension plans don’t have a particularly good long-term outlook, and when the long-term outlook is poor, the formula dictates that companies must contribute more money to the pension funds right now. With interest rates near all-time lows, that’s exactly what has been happening.
But many companies argue that since interest rates are being kept unusually low by the Federal Reserve in order to stimulate economic activity, they shouldn’t actually have to be forking over all this cash to their pension plans.
Accordingly, the pension-smoothing provision in the unemployment bill tweaks the formula to allow companies to contribute less money now, and more later on. (The provision applies only to corporate, single-entity pensions, not state or local pension funds. Also, the “more later on” part of this means it’s not really a revenue- raiser but an accounting gimmick, as we’ve noted before.)
The proposed change has gotten virtually no public attention, but behind closed doors, has been the subject of serious lobbying by business interests. “The businesses always lobby very hard to keep more of their dollars now and not have to put them in those pensions. Many of those businesses are now trying to get out of the pension business altogether,” said Romina Boccia, a fellow at the Heritage Foundation who has worked on this issue.
“The way that they’re convinced, of course, over on the Hill is these companies come in and they say ‘We want to use this money to create jobs in your district and expand our business there,’ and of course that’s very appealing to lawmakers, especially in an election year,” she said.
There is no doubt merit to the business argument here, and having more cash on hand isn’t a bad thing in this economy. For companies with a good long-term profit outlook and well funded pensions, the pension-smoothing provision makes a lot of sense.
And in fact, the corporate pension gap—which was thought to be an enormous ticking time bomb for much of the recession—rebounded remarkably in 2013. The Towers Watson firm studied the Fortune 1000 pension plans and found they rebounded to pre-2008 levels last year. This chart shows a dramatic increase in the number of companies with well-funded pensions:
But many dangers lurk. Analysts credit two primary factors for the rebound: strong equity returns and increased employer contributions.
So a pension-smoothing plan that reduces contributions rolls back a key reason for recent progress—as would any unforeseen decrease in equity returns. Only one year removed from a perilous corporate pension-funding gap, it is perhaps unwise to immediately give companies a pension-funding pass. (It’s also perhaps unnecessary—as interest rates begin to rise, as they are now, company obligations will begin to decrease anyhow.)
Also, the pension-smoothing provision applies to all pension plans, not just the ones on stable financial footing. So those seven percent of pension plans that are funded below 70 percent—which is already dangerous—will also be able to contribute even less going forward. This dramatically increases the risk of pension fund failure at those companies.
Not surprisingly, those troubled companies have been the ones lobbying hardest for the smoothing change, according to Boccia. “They lobby even harder because they need the cash more than the companies that are doing fairly well right now, and have a pension that’s well-funded,” she said, adding that she raised the issue in a meeting with lobbyists who were pushing for the pension-smoothing fix. “They argued with us that ‘Well, [those troubled companies] need it even more because we need to free up cash now to make sure we’re better off down the road, that we’re more profitable than we are now.”
A final danger is that Congress will just keep extending the pay-less periods of pension-smoothing. The provision in this week’s unemployment insurance bill is actually just an extension of a similar provision in the transportation bill two years ago, which was about to expire.
Any failure of a pension fund would result in a taxpayer bailout via the Pension Benefit Guaranty Corporation—along with the serious benefit reductions for workers that usually come along with a bailout. That’s not to say the unemployment relief bill shouldn’t be passed because of this provision, but the possible implications shouldn’t be taken lightly.