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.