by Mitch Kokai
Senior Political Analyst, John Locke Foundation
[A] “reform” bill signed into law in 2012 has taken hold to reduce the security of most pension beneficiaries in the U.S. The law changed the way pension sponsors are required to estimate the present value of their future liabilities. That change reduces the annual payments that sponsors are required to make to keep their plans solvent. In some cases, it frees the sponsors from making any payment at all.
In no case does it actually reduce the pension benefits that have been promised—it just cuts the official estimate of those benefits, and it cuts the amounts that plan sponsors must contribute. It lulls everyone into a false sense of security.
Before that bill passed in 2012, company sponsors of pension plans were required to use the average of interest rates over the previous two years when calculating the present value of their future liabilities. Interest rates being unusually low the past few years, the required calculation produced a high estimate of the liabilities, which produced a high estimate of funding shortfalls and high minimum funding requirements.
Under the new law, companies must use a 25-year average of interest rates. The result is a higher discount rate, a lower estimate of the funding shortfall, and a lower minimum-funding requirement. …
… Why would Congress increase the risk of trouble in the pension system this way? Members were trying to raise new money for highway projects. Working under strict budget rules, spending increases had to be offset with revenue increases. The pension provision is expected to increase tax receipts in the short term, because pension contributions are tax-deductible. A company that makes lower pension contributions will presumably pay more taxes.
The same highway bill, which ironically was titled the Moving Ahead for Progress in the 21st Century Act, also raised revenue the opposite way, by increasing pension security. It raised the per capita premium for federal pension insurance from $35 per participant to $49 this year, indexed to inflation thereafter.
The American Academy of Actuaries recently scolded Congress for indulging in these revenue offsets. Its Pension Finance Task Force sent a letter to congressional leaders, warning, “Extending these temporary provisions accelerates tax revenue while deferring the pension cost to future generations, distorts the pension measurements, and undermines the benefit security of plan participants while increasing the risk exposure to the Pension Benefit Guaranty Corp.”