Execs waiting to see what's in missing tax reform proposal
President Donald Trump's fiscal year 2018 budget proposal contains few details about how it would affect retirement savings, except for higher costs to federal employees and new premiums for underfunded multiemployer pension funds.
The budget, unveiled May 23, includes ambitious ideas for growing the economy and balancing the federal budget by 2027. But the missing retirement details, combined with dramatic cuts to domestic spending and projections of 3% average annual economic growth, earned the proposal a cool reception from legislators, including some Republicans, who noted the Congressional Budget Office projects more modest 1.9% annual economic growth over the 10-year budget window.
Like other presidential budgets in years past, Mr. Trump's proposal “is a suggestion,” said Senate Budget Committee Chairman Mike Enzi, R-Wyo., in a statement. Congressional budget negotiators will examine the proposal, “but Congress is mandated by the Constitution with key spending responsibilities and will ultimately decide what the nation's fiscal priorities will be,” Mr. Enzi said. With the federal debt limit expected to be reached by the fall, those discussions will have increasing urgency.
One of the biggest questions was how much tax reform would help achieve the goals of the proposed budget, which calls for a 10% increase in defense spending and other initiatives that would be funded through tax reform, regulatory rollbacks and a 40% cut in non-defense spending.
The tax reform piece of Mr. Trump's budget calls for lower individual rates and a 15% corporate tax rate, with no more special-interest tax breaks.
But plan executives are keeping an eye on an accompanying tax expenditure document that prioritizes tax deductions, which shows employer deductions for defined benefit plans and defined contribution plans both ranking high on the list but behind employer-provided health care, capital gains and the home mortgage deduction.
Questioned whether the tax-reform savings were being double-counted to pay for both the projected budget savings and the cost of lower tax rates, Treasury Secretary Steven Mnuchin told a Senate Finance hearing May 25 those details were still being worked out. “We are not ready to have a full-blown tax-reform plan, so we haven't put that in,” said Mr. Mnuchin, who promised tax reform would pay for itself. When pressed, he committed to not raising the Social Security eligibility age to pay for tax cuts.
Mr. Mnuchin told the panel the best way to achieve the president's budget goal “is through a combination of tax reform, regulatory relief and trade policies that will return us to levels of 3% sustained economic growth. … This involves making some difficult decisions,” he said.
Ranking committee member Sen. Ron Wyden, D-Ore., a veteran budget negotiator, told Mr. Mnuchin to “speed this up in terms of getting us specifics. …We have to turn it into something that could actually produce a bipartisan bill,” before the fiscal year starts in October.
Federal employee changes
Federal workers are hoping for a lot changes before then. If not, they would see their retirement costs rise dramatically.
The president's budget calls for basing defined benefit payments on workers' last five years of pay instead of the current three, and reducing or eliminating cost-of-living increases. On the defined contribution side, workers would wind up sharing half of the cost of contributions to the $490 billion Thrift Savings Plan, Washington, after a six-year phase-in period. Those changes would reduce the federal deficit by $149 billion over 10 years, and bring “very generous” federal retirement benefits more in line with the private sector, the budget proposal said.
To David Cox, president of the 700,000-member American Federation of Government Employees, Washington, the proposal “continues a race to the bottom,” after years of pay freezes, modest wage hikes and employee retirement contribution increases that add up to a 6.5% earnings reduction over the past decade. National Treasury Employees Union President Tony Reardon considers the budget “so extreme that it only increases the likelihood of a showdown with Congress.”
Multiemployer plan shock
Extreme is also a description used by multiemployer plan trustees and experts, who were shocked by the budget proposing new, additional premiums to the Pension Benefit Guaranty Corp. from underfunded multiemployer pension plans: a variable rate premium for underfunded plans and exit premiums if a contributing employer wants to leave a plan.
Those changes would raise an additional $16 billion that could keep the PBGC's nearly insolvent multiemployer program going for 20 years, said the budget proposal, which also called for another $5 billion from having all plan sponsors pay premiums on an accelerated basis so they fall within the 10-year federal budget window. Adding these new premiums would require legislation.
Diane Gleave, senior vice president and actuary with Segal Consulting in New York, considers the multiemployer plan proposals counterintuitive, because it asks struggling plans to pay higher premiums, and “this could push them over the edge,” which in turn would exacerbate the PBGC's deficit.
Unlike corporate plan sponsors that can avoid variable premiums by shifting resources or borrowing to improve funding levels, multiemployer plans are funded through collectively bargained labor agreements between current workers and employers. “In many cases, higher premiums could reduce dollars available for wages and benefits and even negatively affect jobs. (The proposal) really does have far-reaching implications,” Ms. Gleave said.
Michael D. Scott, executive director of the National Coordinating Committee for Multiemployer Plans in Washington, thinks allowing struggling multiemployer pension plans to reduce benefits as allowed by the Kline-Miller Multiemployer Pension Reform Act of 2014 is a better option for both plans and the PBGC itself.
“Until MPRA is allowed to work the way it was intended, we do not know the actual level of unresolvable net deficit at the PBGC, and therefore what, if any, level of new premiums are actually required,” Mr. Scott said.
This article originally appeared in the May 29, 2017 print issue as, "Retirement details elusive in budget".