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  • Pension Smoothing on UI Bill Is an Accounting Trick That Could Lead to Taxpayer Bailout

    The Senate is trying to use an accounting trick to claim deficit-reduction from a bill to extend federal long-term unemployment benefits. Far from that, the proposal to “smooth” pension contributions would merely shift tax revenue from the future into the present while destabilizing pensions even further and increasing the risks of a taxpayer pension bailout.

    While details have yet to emerge, the bill’s sponsor, Senator Jack Reed (D–RI), reportedly described the proposal for “pension smoothing” as “allowing companies to use historical data in determining pension contributions.”

    A similar approach was used in the 2012 transportation conference bill, also known as MAP-21. The idea behind the proposal is to loosen the rules governing pension contributions, allowing corporations that still sponsor defined-benefit plans to contribute less money to those plans.

    In particular, the MAP-21 law changed the interest rate calculation that determines how much corporations must contribute to their pension plans each year. This matters because the interest rate calculation is supposed to keep the pension plans adequately funded. When corporations underfund their pensions and end up in bankruptcy, the U.S. taxpayer could be on the hook for a pension bailout through the Pension Benefit Guaranty Corporation (PBGC), a federal agency.

    The PBGC guarantees the pension promises made by private businesses. When a business whose pensions are underfunded goes bust, the PBGC steps in to help protect workers’ pensions. The agency is supposed to be self-funded, in part from premiums collected by employers who sponsor defined-benefit plans subject to the PBGC’s guarantee. The problem is that the PBGC itself is suffering from severe underfunding. Its deficit increased to $36 billion in 2013 due to the deteriorating financial condition of employer pension plans.

    The most recent Senate plan to retroactively extend federal long-term unemployment benefits would worsen the problem of pension underfunding, likely increasing the PBGC deficit over time and risking a future taxpayer bailout of the federal agency.

    Moreover, Senator Reed’s claims that the proposal would reduce the deficit by $1.2 billion are bogus, as they are based on a budget window accounting gimmick. The proposal would increase revenue in the short term but reduce revenue in future years. And by worsening some firms’ pension underfunding problems, it could actually increase the deficit in the long run.

    Lawmakers should not fall yet again for this old-hat tactic.

    Posted in Capitol Hill [slideshow_deploy]

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