By Alex Brill and Alan D. Viard

The bipartisan infrastructure bill approved by the Senate on August 10 includes a number of budget gimmicks that help make it look fully “paid for.” One of the gimmicks is pension smoothing, which allows private companies to make smaller contributions to their defined-benefit pension plans, thereby endangering the plans’ financial viability over time.

Companies with defined-benefit pensions make contributions that
are invested to finance future benefit payments to retirees. When interest
rates are lower, invested contributions will grow more slowly, and companies are
therefore normally required to make larger contributions to ensure that enough
money will be available for future benefits.

Pension smoothing allows companies to ignore current low interest
rates when computing their required contributions and instead pretend that interest
rates are close to their 25-year historical average, a significantly higher
level. By assuming higher interest rates, pension smoothing allows companies
to make smaller contributions now while forcing them to make larger
contributions in later years to offset the shortfall.

Unfortunately, pension smoothing is well suited for budget
gimmickry. Because corporations’ pension contributions are tax-deductible, lower
contributions translate into smaller tax deductions and higher corporate income
tax revenue in the short run. Of course, any short-term revenue gains will be offset
in later years when companies must make larger contributions, entitling them to
larger tax deductions. Because congressional budget rules only look at revenue
effects in the first 10 years, however, the short-run corporate tax revenue
gains are counted while the offsetting long-run revenue losses are ignored.

Moreover, the underfunding resulting from pension smoothing heightens
the risk that some defined-benefit plans will become insolvent. Increased
insolvencies will impose costs on the Pension Benefit Guaranty Corporation
(PBGC), a federal agency tasked with paying insolvent plans’ promised benefits.

Congress has been unable to resist the siren call of pension smoothing. The policy first appeared in a July 2012 highway funding law and returned in subsequent legislation in August 2014, November 2015, and most recently in the March 2021 American Rescue Plan. The bipartisan infrastructure bill is poised to follow that lamentable pattern, tapping the gimmick for $2.9 billion of short-run revenue.

We have not been alone in our denunciations (here, here, and here) of pension smoothing. Previous uses of pension smoothing have been criticized by commentators across the ideological spectrum, including analysts at the Center for Budget and Policy Priorities, the Urban-Brookings Tax Policy Center, the Bipartisan Policy Center, the Committee for a Responsible Federal Budget, and the Heritage Foundation. The gimmick’s inclusion in the infrastructure bill has drawn criticism from analysts at the American Action Forum and, as before, the Committee for a Responsible Federal Budget.

Congress should heed this consensus and abandon the pension-smoothing gimmick.

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