A mandate for pensions?
By Pensions & Investments | July 9, 2012
Strange as it may seem, the U.S. Supreme Court ruling upholding the Patient Protection and Affordable Care Act of 2010 could eventually affect private and public pension plans.
That is because the ruling seems to expand the government's power to levy indirect taxes, and such taxes could be used to force companies and individuals to adopt and participate in pension plans.
Previously, indirect taxes were taxes on activities and products and were triggered by a transaction.
In this case, the court upheld the imposition of a tax on individuals who did not buy health insurance. That is, it upheld the imposition of a tax on the failure to engage in a transaction. The ruling might embolden future congresses and administrations to take the same approach to transforming pension coverage and even corporate governance.
Congress could, for example, impose higher corporate income taxes, or a specific pension levy, on employers who do not provide pension plans for their employees, and also on employees who do not participate in such plans. It could go further and replace the current deductibility of pension contributions for companies and individuals with a tax penalty for not having a pension plan and/or not participating in a plan.
That is, Congress could replace the carrot with a stick.
The key issue in the health care case was “whether failure to engage in economic activity (the purchase of health insurance) is subject to regulation under the Commerce Clause.” If the court had ruled in the positive, the Commerce Clause could have been used to force companies to offer retirement plans, and individuals to participate in them.
However, Chief Justice John G. Roberts, writing the 5-to-4 opinion, rejected the use of the clause in the Constitution granting Congress the power to regulate commerce to mandate health-care coverage. In invalidating that justification for the section of the law requiring individuals to buy health insurance, Mr. Roberts cited a case involving the Railroad Retirement Board from 1935, invalidating compulsory retirement pension plans for employees of transportation companies subject to the Interstate Commerce Act. The court at that time found the law “related essentially "to the social welfare of the worker, and therefore remote from any regulation of commerce as such.'”
The precedent seemed to prevent Congress from mandating through the Commerce Clause that businesses have pension plans and that employees participate in them. But that precedent didn't prevent Congress from trying to expand pension coverage by other means. In fact, it has done so through tax concessions by making corporate and individual contributions to pension plans tax deductible.
Because of the costs and administrative burdens, many companies still do not offer even a defined contribution plan.
But Congress now could go further and impose additional taxes on companies that offer no such plans, as long as the taxes were structured like the health-care tax. As Mr. Roberts noted in the decision, because the penalty for not buying health insurance “is paid like a tax, to the agency that collects taxes” — the Internal Revenue Service “rather than, for example, exacted by Department of Labor inspectors after ferreting out willful malfeasance — suggests that this exaction may be viewed as a tax.” In the case of a tax, the mandate is constitutionally valid, according to the opinion.
For Congress to use such an approach to expanding pension coverage would be dangerous, especially in a weak economy in a highly competitive global marketplace.
The companies that do not already offer pension coverage of some kind generally are small and marginal businesses. Increasing their tax burdens might well put them out of business, costing the country much needed jobs. If the mandate were limited to companies with more than 50 employees, it could still hurt job creation (as the health-care reform mandate might) by inducing companies not to hire more than 50 employees. Such a change in tactics could even send more jobs overseas.
It might increase the percentage of private-sector employees with some form of pension coverage while reducing the number of workers with jobs.
In corporate governance, Congress could use tax penalties to encourage companies to give shareholders more control, e.g. by penalizing those that do not give shareholders a binding say-on-pay vote, or binding votes on other issues, such as board composition. The Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, mandated an advisory say-on-pay vote on executive compensation, taking the authority from the shareholders and boards to decide whether to conduct such votes. Corporate activists, and some in Congress, want to go further, and using tax penalties to achieve the goal would have the added advantage of potentially raising badly needed federal revenue. In the United Kingdom, where say-on-pay voting has been in effect for about 10 years, Prime Minister David Cameron wants to give shareholders a binding vote on executive compensation.
Taxes have long been used for social engineering, aside from raising revenue to finance federal programs. Mr. Roberts appears to recognize no limits on their use to promote certain outcomes. As he wrote in the opinion, “None of this is to say that the payment (a penalty the court defines as a tax) is not intended to affect individual conduct. Although the payment will raise considerable revenue, it is plainly designed to expand health insurance coverage. But taxes that seek to influence conduct are nothing new.”
It's likely many in Congress will appreciate the Supreme Court approval that taxes can be used to affect personal and corporate behavior, even to force people to make transactions they otherwise would not make.
Finally, because the law was found constitutional, states will have to decide whether to expand Medicaid coverage. Those that decide to do so will eventually face increased costs for the expanded coverage, when the federal government's contribution drops to 90% of the increase. This could affect their ability to improve the funding of their generally underfunded pension plans. It might even lead to reduced contributions, making benefits less secure. n