Most people learn by the age of 10 or so that making promises is easier than
keeping them. That's why really big promises like corporate pensions and national
retirement/health care programs are so easy to screw up. Offering someone a
cushy retirement or a lifetime of healthcare feels great and generates massive
goodwill from the recipient. So elected officials and corporate executives
tend to over-promise in the moment and leave the hard part -- actually making
good on those promises -- for their successors.
Today, of course, we're deeply into the hard part. Old-line US companies are
hobbled by "legacy costs" of paying for the retirement of yesterday's workers
while state and local governments, after years of failing to put aside enough
to cover the retirement of their teachers and cops, are being bankrupted by
the burden. And now comes this:
The Federal Highway Trust Fund is expected to run out of money in August. So,
naturally, Congress is debating a temporary fix that involves letting corporations
underfund their pension systems.
Of course, we could replenish the fund by raising the federal gasoline tax,
which is its primary source of financing. That's what Senator Bob Corker,
Republican of Tennessee, and Senator Christopher S. Murphy, Democrat of Connecticut,
want to do. But increasing gas taxes is unpopular, so Congress hasn't done
so since 1993, which means that the tax on gas has actually fallen 39 percent
over the last 21 years after you adjust for inflation. Instead, Congress
has used a series of gimmicks and shifts to keep the fund solvent as highway
construction costs have risen.
The latest proposal, which passed the Republican-controlled House Ways and
Means Committee on Thursday, works like this: If you change corporate pension
funding rules to let companies set aside less money today to pay for future
benefits, they will report higher taxable profits. And if they have higher
taxable profits, they will pay more in taxes over the 10-year budget window
that Congress uses to write laws. Those added taxes can be diverted to the
Federal Highway Trust Fund.
Unfortunately, this gimmick will also result in corporations paying less
in taxes in later years, when they have to make up for the pension payments
they're missing now. But if it happens more than 10 years in the future,
it doesn't count in Congress's method for calculating budget balance. "Fiscal
responsibility," as popularly defined in Washington, ignores anything that
happens after 2024.
Letting companies underfund pensions so they pay more taxes is a dumb idea,
but it's not a new one: A similar strategy was part of the last bipartisan
highway bill, which passed in 2012. The new proposal would simply extend
the underfunding that was already allowed in the 2012 bill for a greater
number of years.
This idea has come up in the last few years because pension costs are heavily
driven by interest rates -- and lower rates mean higher costs. When rates
are low, as they are now, the government tells companies to set aside more
money to pay for future pension benefits because they can't count on high
returns on safe investments to cover pension costs. Some companies have complained
that "artificially low" interest rates are forcing them to actually overfund
their plans. The 2012 highway bill and the new proposal give companies relief
on that front, letting them fund their pensions based mostly on a historical
25-year average of interest rates; essentially, they're being allowed to
calculate the cost of promising pension benefits on the basis of investments
-- safe, high-yielding bonds -- that were once available to pension funds
but can't be found today.
This is wishful math. Low long-term interest rates are not artificial; they
reflect an expectation that the Federal Reserve will keep rates unusually
low for a long time, and that economic growth will be relatively weak and
uncertain. That, in turn, means that returns on safe investments like bonds
will continue to be below historical averages, and that corporate pension
funds still won't get the safe, high returns they used to enjoy. If companies
are allowed to put less money into their pension funds in that environment,
the funds will deplete over time, and the companies will just have to pay
more later -- unless they go bankrupt, in which case a federal agency (the
Pension Benefit Guaranty Corporation) will be on the hook to pay retirees.
Some thoughts
This is emblematic of so much of today's world. If the reality we've created
through our past choices is uncomfortable, just redefine the terms of the debate
to make formerly bad things look good. If we borrow too much, lower the value
of the currency in which those debts were contracted. If the resulting inflation
numbers are problematic, change the definition of inflation to hide the increase.
If jobs are harder to get because of rising debt and inflation, simply conflate
part-time jobs (which are rising) with full-time jobs (which are evaporating)
and say "employment" is growing strongly. In this context, redefining "fully-funded" pensions
downward makes complete sense, right?
That it's a bad long-term strategy should be obvious to pretty much any objective
observer. But by the logic of Keynesian economics, maybe not: If people think
everything is okay, then maybe they'll behave in ways that actually make that
hope a reality. At worst, they'll borrow and spend for another year or two,
which might be enough for today's CEOs, congresspeople and Fed officials to
retire with their reputations (and fully-funded pensions) intact, leaving tomorrow's
plan administrators and recipients to dicker over a shrunken pie.
By the way, if corporate profits are artificially inflated by lower pension
funding requirements, then the stock market might be artificially inflated
by those higher earnings. From a modern perspective, this is a highly-efficient
piece of "macro-prudential" policy, killing two perceptual birds with one
stone. Fooling us twice, in other words.
And a final philosophical note: Why is the federal government involved in
road building in the first place? Washington's money comes from the states,
which means we tax New York investment bankers to pay for California highways,
and tax California entrepreneurs to pay for New York mass transit. Why not
just leave the money with the locals to manage their roads as they see fit,
and fire the bureaucrats who currently shuffle the checks back and forth? The
statist answer is that if Washington doesn't do it, it won't get done. To which
most libertarians would respond, if something needs doing the states can do
it just as easily -- and more cheaply -- than the feds.
