ERIC calls ‘pension smoothing’ sound policyNews added by Benefits Pro on September 3, 2014

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Joined: September 07, 2011

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By Nick Thornton

The ERISA Industry Committee has taken issue with a recent Washington Post editorial that slammed "pension smoothing."

The piece calling out Congress for using an “egregious budgetary gimmick” to fund the recently passed Highway and Transportation Funding Act of 2014.

More than half of the $10.8 billion earmarked for infrastructure projects will be financed by pension smoothing, according to the Post. By lowering funding obligations to their defined benefit plans, Congress was able to increase plan sponsors’ tax liabilities, providing the revenue to fund the bill.

In a letter responding to the Post’s editorial, Scott Macey, the president and CEO of the ERISA Industry Committee, took issue with the editorial’s dismissal of pension smoothing, which Macey calls a “sound policy.”

“The Federal Reserve has maintained artificially low interest rates, inflating pension liabilities,” wrote Macey. “Companies should not be required to make cash contributions to their pension plans based on inflated and inaccurate pension liability numbers.”

Without smoothing, Macey argued that pension funding is subject to volatility that can potentially discourage sponsors from continuing defined benefit plans.

“Companies have had to choose between capital infusion, hiring and pension funding. Pension smoothing helped them balance these demands by allowing companies to use average bond rates from a longer, more realistic period in measuring their pension liabilities,” Macey wrote.

The Post’s editorial argues that underfunded pensions expose the “federal pension insurance fund, and the taxpayers who ultimately back it, to greater risk.”

But the Pension Guarantee Benefit Corp. — the pension insurance fund referred to by the editorial board’s writers — is not, in fact, funded by taxpayer revenue. Instead, employers pay premiums that support the PBGC’s work.

Macey pointed to the PBGC’s most recent annual report, which showed significant funding improvement in its single-employer program. According to Macey, the single-employer program is “adequately funded to pay benefits for years to come.”

The Washington Post’s editorial noted that pension smoothing was used to fund the previous highway bill.

“Pension smoothing has just crossed the line between exception and habit. Once a bit of an embarrassment, even to Congress, it’s becoming normalized,” the Post said.

House Republicans previously blocked an effort to use pension smoothing as way to fund the extension of unemployment benefits. That they allowed it to fund the highway bill is hypocritical, according to the editorial.

Neither Congress nor the president had the “courage” to support an increase in the federal gas tax, which is meant to fund the highway trust fund, and has not been raised for more than 20 years, according to the editorial.

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