Monday, July 14, 2014

Everyone Does It: Avoiding Corporate Pension Contributions

Everyone Does It: Avoiding Corporate Pension Contributions

When it comes to funding pensions and retirement systems, we seem genetically predisposed to avoid our long-term obligations.  Individuals don’t save enough.  State and local governments don’t contribute enough.  Now House Republicans want to make sure that corporations don’t pay enough into their pension plans. 

The Federal Highway Trust Fund is running out of money.  Higher gasoline taxes, a sensible solution, are out of the question.  So Congress wants to use an accounting trick to lower corporate pension contributions.  This will raise corporate tax receipts in the short-run because pension contributions are deductible.  The technique is called smoothing.  Instead of estimating pension liabilities at today’s interest rates, corporations will be allowed to use a historic average.  Since rates were higher in the past, the required discount rate will be higher, and the pension liability will appear to be smaller.  In the long run, corporations will eventually have to increase their payments, which will decrease tax revenues. 

Before Democrats begin to castigate Republicans, they might check recent legislative history.  When it came to extending long-term unemployment benefits, Democrats tried to seize on the same device.  They wanted to pay for the extension by requiring corporations to use pension smoothing. Ironically, the Republicans shot down the approach as “unsound.”

Congress has tied itself into an untenable position because it will not enact any proposal that raises revenues. As a result, Congress is robbing Peter to pay Paul and driving by looking in the rearview mirror all in one proposal all at the same time.     


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