The Agenda

Josh Barro on a Short-Sighted Pension ‘Fix’

At Bloomberg View, Josh Barro notes a profoundly disturbing development on rules governing corporate pensions:

Private firms that offer pensions are required by law to use a discount rate that is tied to interest rates on long-term, highly rated corporate bonds, under the theory that a pension obligation and a bond obligation are similarly risky: Each can be broken only if the company goes bankrupt. Since interest rates are currently near historic lows, companies are being told to set aside a lot of money for pensions; the lower the discount rate, the more cash you need on hand today to fund future liabilities.

Companies don’t want to set aside so much money. So they lobbied Congress to change the rules so that they can choose discount rates based not on current rates but on an average of interest rates over the last 25 years. Since funding a pension plan is an expense that companies deduct before calculating tax, a more lax pension funding standard will lead to corporations reporting higher profits, and paying higher corporate taxes — making about $9.4 billion over 10 years available for highways and student loans.

The end result, as Josh explains, is that corporate pension plans that wind up going bust will have bigger funding gaps than they would otherwise, thus increasing the burden on the Pension Benefit Guaranty Corporation. To be sure, premiums to the PBGC have increased in a welcome acknowledgment of the risks, yet this is being counted as a revenue gain despite the fact that it is might to account for higher expected future losses. This is short-term thinking at its most perverse.

Josh ends his post by making the case for a higher federal gasoline tax as a smarter way to pay for infrastructure. Given that the tax hasn’t increased since 1993, this seems reasonable enough, though I don’t embrace Charles Krauthammer’s view that the federal gasoline tax should be dramatically higher.

On a tangential note, I’ve noticed that there is strong conservative resistance to the idea of a vehicle miles traveled (VMT) tax. I’ve made the case for it in the past and I continue to think that it is a sound idea.  


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