Now Congress faces a June 30th deadline, having only been able to pass a 90-day funding extension at the end of March for the nation's transportation needs. As important as stable transportation spending is to the nation's crumbling infrastructure, this bill is not only about roads and bridges. Private corporations are using it as a vehicle to ask Congress to change how they calculate their annual pension contributions, which could create a huge unfunded liability for the American taxpayer.
Currently, the law requires corporate plans to measure their liabilities, and determine the annual contribution needed to fund them, by using the rate of return on corporate bonds - the discount rate. As historically low bond rates force higher contributions, corporations now want to reduce annual payments to their pension plans by lobbying Congress to change this rate. Not only is this misleading and addictive, but artificially lowering contributions today will add to future pension shortfalls tomorrow-possibly requiring further public bailouts.
The provision in the Senate-passed version of the Transportation bill currently under consideration in the House would allow corporations to use a 25-year average rate as opposed to the current 2-year average, increasing the current discount rate from the 4 percent range to roughly 6 percent. Since liabilities are sensitive to discount rate assumptions, the plan's liability will change roughly 15 percent for every one percentage point change in the discount rate. For example, Boeing reports that a mere quarter of a point increase in the discount rate could cut its pension liability by $1.7 billion. Apply a small discount rate hike across all private plans and it's easy to see why corporations are lobbying Congress for a discount rate boost.
Since 2002, Congress has, on a few occasions, let corporations use a higher discount rate to determine their contributions. Among other companies, American Airlines reduced its annual contribution to employee pension plans by $2.1 billion. Unfortunately, today the airline faces a shortfall in its pension plan, triggered by the growing expense for employee retirement. Its parent company filed for bankruptcy in November.
Corporate pension plans are insured by a federal agency, the Pension Benefit Guaranty Corporation (PBGC). If for some reason corporations are not able to pay out the pension benefits they promised to retirees, the PBGC and taxpayers are on the hook for it.
