WASHINGTON – If there’s anything that can unite Democrats and Republicans in the partisan swamp of Capitol Hill, it’s free money.
The latest example of free money in Washington is a retread proposal called “pension smoothing” that raises money but doesn’t increase anyone’s taxes. To some people’s way of thinking, that’s a win-win situation. But others say lose-lose is more like it, arguing that it’s budget fakery at its worst and that it could undermine pension security for millions of workers.
Lawmakers reprised the pension provision Tuesday to help find money for a government fund that finances highway construction projects, with both Democrats and Republicans getting into the act. The highway bill passed by a sweeping 367-55 vote.
Here’s how it works: The pension measure would allow companies to reduce the amount that they contribute to their pension funds now and make up for it later. Since pension contributions are tax deductible, companies would owe more tax revenue in the next few years as more of their earnings are taxed. But in the later years, they would be able to claim higher deductions from larger contributions to their pension funds.
Over time, the pension measure doesn’t raise revenue. But over the next 10 years — the time frame used to estimate the cost of legislation — it does.
This has budget experts crying foul. Just as using the pension changes as a painless budget “offset” is backed by both liberals and conservatives, think tanks from the left, right and political middle all oppose it as a gimmick. And they warn it could cost taxpayers in the long run because taxpayers could be on the hook if an insured pension plan can’t meet its obligations and has to turn to the government’s Pension Benefit Guaranty Corp. for help.
“It pretends to raise revenue. It doesn’t. It’ll lose as much money, plus interest, in the future as it gains in the short term,” says Len Burman, director of the Tax Policy Center, a joint project of the left-of-centre Brookings Institution and Urban Institute. “And it undermines the pension security of American workers. Aside from that, it’s a great idea. It’s outrageous.”
A plan by Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, would raise almost $19 billion over the next six years by extending for another five years a pension smoothing plan enacted to help pay for the 2012 highway bill. But over the final four years of the budget window, roughly two-thirds of that revenue gain is taken back as companies take higher tax deductions from larger pension contributions in the longer term. So the 10-year revenue gain is $6.4 billion, though it’ll continue to cost revenues after 2024.
The Senate’s version raises less short-term cash, with a three-year extension of the tactic. Critics shouldn’t take heart: The Senate is saving the other two years to “pay for” other must-do legislation such as Forest Service payments to rural schools, underfunded coal miner pensions, and a trust fund for reclamation of abandoned mines.
Some companies argue that they again need relief from the current pension funding formula, which requires higher contributions when interest rates are low, as they are now. And they say the cash freed up by lower pension contributions in the short term would boost investment and therefore the economy.
“It seems like a win-win. Congress gets extra revenue that they can then use … to say, ‘Oh, we’re paying for this additional highway spending.’ And they also get to claim they’re helping out these companies,” said Romina Boccia, a senior policy analyst at the conservative Heritage Foundation. “Meanwhile, the taxpayer is on the hook for a potential bailout of these private pensions down the road.”
Both political parties embrace the tactic. It was used in 2010 to help forestall a cut in payments to Medicare doctors, which prompted Rep. Paul Ryan, R-Wis., to warn that “these savings are likely to be more than offset by greater federal obligations that will appear outside the 10-year window we use to enforce the budget.”
And in an analysis by the Congressional Budget Office released last week, the nonpartisan scorekeeper said the pension provision “would increase the amount of underfunding” in single-employer, defined benefit pension plans and “would probably cause some plans to be terminated more quickly.”
“This is pretty bad, not only because it doesn’t produce any real savings but it creates a risk of actually worsening our fiscal outlook if the reduced pension contributions result in more pension plans being underfunded and the government having to bail them out,” said Ed Lorenzen, a senior analyst at the Committee for a Responsible Federal Budget, which advocates for lower budget deficits.
“We’re in a difficult position because the Republicans don’t want to look at anything else,” said Rep. Sander Levin, D-Mich. “And you can’t let the highway fund go bust.”
There is other budget fakery in the measure as well, including using $3.5 billion in so-called Customs user fees that won’t arrive until 2024 to pay for spending now.
Asked Tuesday to respond to criticism of the pension idea, House Speaker John Boehner, R-Ohio, gave only a halfhearted endorsement of the measure. Camp, the Ways and Means chairman, said it was too late to try anything else.
“Then why would the president be supporting our bill to fix the highway funding over the next year? Why would Democrats be supporting it in both the House and the Senate?” Boehner said. “Listen, these are difficult decisions in difficult times in an election year.”
EDITORS NOTE _ An occasional look at how Washington works behind the scenes.