A consortium of 300 corporations — including Boeing Co., Ford Motor Co. and YRC Worldwide Inc., along with labor unions and lobbying and trade groups, such as the American Benefits Council — appealed Nov. 12 for Congress to provide relief for corporate sponsors of defined benefit pension plans. The coalition sent a joint letter to congressional leaders arguing that companies facing increased pension contributions in 2009, based on requirements under the Pension Protection Act of 2006, will have to spend sorely needed corporate cash that could otherwise be used for investments and hiring that will stimulate the economy.
We have heard this argument before. It suggests that companies must choose between contributions to their pension plans or more fruitful deployment of the same cash. While this might appear true for each company, when viewed in terms of the whole economy, it turns out to be simply untrue. What the argument ignores is what happens to those cash contributions. The argument implies that the money goes down a rat hole, never to be seen again.
In fact, cash contributed to pension plans is immediately reinvested in capital market securities, so there is no reduction in total supply of capital in the economy. The money contributed by one company will find its way, through the capital markets, to those companies with the best opportunities for productive investment and hiring. The very purpose of the capital markets is to ensure that such opportunities are funded.
Furthermore, these pension contributions are, due to tax rules, high-powered. Money contributed to pension plans is tax deductible at the corporate level, where marginal rates range up to 35% federally and can be higher when state and local taxes are included.
$1 billion in contributions = $1 billion in investment capital
What does this imply for the American economy? It means $1 billion in contributions costs a contributor in a 40% total bracket only $600 million (the federal government chips in $350 million and local governments another $50 million) but it provides a full $1 billion in new investment capital to other companies.
The Center for Retirement Research at Boston College in a new report estimates that contribution requirements will increase by $90 billion in 2009 if relief is not granted. Suppose that, on average, the contributors are subject to a 20% marginal tax rate. Making the contributions will reduce taxes by $18 billion. Comparatively, not making the contributions will increase the aggregate tax burden on corporate America by that same $18 billion. Contribution relief, at the macro level, is not stimulative. Quite the contrary, contribution relief, with wisdom usually attributed to Herbert Hoover, increases taxes and contracts an economy in recession and starved for liquidity and capital.
PPA was enacted specifically to ensure that employee pensions were protected in bad times as well as good. The contribution reduction sought by employers is tantamount to borrowing from employees who should not be made the lenders of last resort. Such borrowing leverages the company against the interests of their own employees and should not go unnoticed by rating agencies.
The coalition’s letter implies that Americans face an imminent trade-off between jobs and pension benefits requiring immediate congressional action. U.S. pension funding rules, however, allow significant flexibility in the timing of actual cash contributions to pension plans. For many companies, cash contributions determined on the basis of plan assets and liabilities as of Jan. 1, 2009, will not be due until 2010 — more than a year from now.
By resisting calls for weakening pension funding standards, Congress can make sure that $90 billion of contributions are directed to the most promising investment and hiring opportunities, that corporate tax deductions are added to the supply of private capital, and that pension plan members and the Pension Benefit Guaranty Corp. receive the badly needed security of better plan funding promised by the Pension Protection Act of 2006.
Jeremy Gold is president of Jeremy Gold Pensions, a pension, actuarial and investment consulting firm in New York. Daniel P. Cassidy is president of Cassidy Retirement Group Inc., a Concord, Mass.-based strategic retirement plan consulting firm.