This Road Work Made Possible by Underfunding Pensions

The Federal Highway Trust Fund is expected to run out of money in August. So, naturally, Congress is debating a temporary fix that involves letting corporations underfund their pension systems.

Of course, we could replenish the fund by raising the federal gasoline tax, which is its primary source of financing. That’s what Senator Bob Corker, Republican of Tennessee, and Senator Christopher S. Murphy, Democrat of Connecticut, want to do. But increasing gas taxes is unpopular, so Congress hasn’t done so since 1993, which means that the tax on gas has actually fallen 39 percent over the last 21 years after you adjust for inflation. Instead, Congress has used a series of gimmicks and shifts to keep the fund solvent as highway construction costs have risen.

The latest proposal, which passed the Republican-controlled House Ways and Means Committee on Thursday, works like this: If you change corporate pension funding rules to let companies set aside less money today to pay for future benefits, they will report higher taxable profits. And if they have higher taxable profits, they will pay more in taxes over the 10-year budget window that Congress uses to write laws. Those added taxes can be diverted to the Federal Highway Trust Fund.

Unfortunately, this gimmick will also result in corporations paying less in taxes in later years, when they have to make up for the pension payments they’re missing now. But if it happens more than 10 years in the future, it doesn’t count in Congress’s method for calculating budget balance. “Fiscal responsibility,” as popularly defined in Washington, ignores anything that happens after 2024.

Letting companies underfund pensions so they pay more taxes is a dumb idea, but it’s not a new one: A similar strategy was part of the last bipartisan highway bill, which passed in 2012. The new proposal would simply extend the underfunding that was already allowed in the 2012 bill for a greater number of years.

This idea has come up in the last few years because pension costs are heavily driven by interest rates — and lower rates mean higher costs. When rates are low, as they are now, the government tells companies to set aside more money to pay for future pension benefits because they can’t count on high returns on safe investments to cover pension costs. Some companies have complained that “artificially low” interest rates are forcing them to actually overfund their plans. The 2012 highway bill and the new proposal give companies relief on that front, letting them fund their pensions based mostly on a historical 25-year average of interest rates; essentially, they’re being allowed to calculate the cost of promising pension benefits on the basis of investments — safe, high-yielding bonds — that were once available to pension funds but can’t be found today.

This is wishful math. Low long-term interest rates are not artificial; they reflect an expectation that the Federal Reserve will keep rates unusually low for a long time, and that economic growth will be relatively weak and uncertain. That, in turn, means that returns on safe investments like bonds will continue to be below historical averages, and that corporate pension funds still won’t get the safe, high returns they used to enjoy. If companies are allowed to put less money into their pension funds in that environment, the funds will deplete over time, and the companies will just have to pay more later — unless they go bankrupt, in which case a federal agency (the Pension Benefit Guaranty Corporation) will be on the hook to pay retirees.

But even if my prediction is wrong, a change to corporate pension policy is a bad way to pay for highways. Let’s say the companies are correct — that low long-term interest rates do not reflect fundamentals, and that interest rates will rise soon, showing that corporate pension plans have really been overfunded all along. If that’s true, adjusting the rules now will simply create tax revenue that would otherwise come in later when interest rates rise, allowing companies to cut their pension contributions naturally. It does nothing to substantively affect the long-term fiscal position of the federal government, or to make more funds available to pay for highways into the distant future.

And that’s something everybody in Congress knows: The hunt for “pay-fors” — deficit-cutting measures to offset things like replenishing the Highway Trust Fund — is not so much about keeping the economy strong. It’s more about being able to announce that the Congressional Budget Office said your plan wouldn’t raise the deficit over the next 10 years. That works even if, as with the latest Republican proposal, you take all the added corporate tax revenue over the 10-year window to keep the Highway Trust Fund solvent for just five additional months. Yes, even if we run with this gimmick, Congress will be back in January, trying to find a way to claw the fund out of insolvency again.

Raising the gas tax and indexing it to inflation would be a fine way to fix the perennial shortfall in the fund without increasing the deficit. But there is another perfectly valid option: replenishing the fund by borrowing money. Interest rates are low, investors are clamoring to lend money to the United States and federal debt is projected to be a stable share of the economy over the next 10 years. This is a good time to borrow money and to spend the proceeds on useful highway construction.

Yet instead, Congress is debating whether it should — again — let corporations underfund their pension plans, and generate a one-time boost in tax revenue. And Congress would use that revenue to fund a few months of a continuing spending program that it does not have a plan to make permanently solvent, while exposing pension beneficiaries and taxpayers to risk if a corporation goes bankrupt after underfunding its pension plan.

If you define “fiscal responsibility” solely in terms of whether the federal budget deficit grows or shrinks over a 10-year window, you can reach the conclusion that the foregoing plan serves the goal of “fiscal responsibility.” Which only goes to show that politicians in both parties have settled on an insane definition of “fiscal responsibility.”