Congress faces contradictory proposals that will do little to support pension plans and overall economic recovery.
First, Congress will consider President Barack Obama's fiscal 2011 budget proposal, unveiled Feb. 1, that would see corporate income tax revenue rise 89% to $297 billion in fiscal 2011, and includes other measures that would raise corporate tax revenue, including a curtailment of tax benefits of multinational companies regarding offshore earnings. It also contains small tax relief proposals for small and midsize companies.
Second, Congress is considering a bill to provide funding relief to companies — mainly large ones — that sponsor defined benefit pension plans.
In other words, on the one hand, the administration believes corporations, in aggregate, are so rich they can afford to pay more to the government, even in this weak economy.
On the other hand, Reps. Earl Pomeroy, D-N.D., and Patrick Tiberi, R-Ohio, believe corporations are so poor they can't meet their pension funding obligations, and so have sponsored legislation to provide them relief from funding the obligations. The bill, “The Preserve Benefits and Jobs Act” would give companies a temporary break from meeting the increased contributions required to shore up funding shortfalls that have occurred because of the extraordinary investment losses and low interest rates resulting from the market meltdown of 2008 and early 2009.
It would continue the relief offered in the Worker, Retiree and Employer Recovery Act, enacted in December 2008, that modified the funding requirements of the Pension Protection Act of 2006. The lawmakers' reasoning for the legislation is that the large pension contributions necessary to make up for the meltdown are too onerous during the current economic downturn and will take away capital for business investment and job growth needed to revive the economy.
In exchange for the relief, the bill seeks protection for pension benefits. Companies would be precluded from freezing their plans or be required to raise benefits. The bill is pending in the House's Subcommittee on Health, Employment, Labor and Pensions.
Ironically, given Mr. Obama's budget proposal, any money corporations might save through the pension funding relief could indirectly — in part at least — go to the federal government in increased taxes, rather than to strengthening companies' financial condition and possibly saving or adding jobs, and providing incentives for corporations to maintain their pension plans.
Raising income taxes for corporations and individuals, as the budget proposal does, in a poor economic environment will take money out of the productive economy and a market that can allocate resources to their best uses, slowing recovery.
Funding relief doesn't make sense either. Funding relief enacted in 2008 shouldn't pave the way for more funding relief in 2010. As Jeremy Gold, president of Jeremy Gold Pensions, a pension, actuarial and investment consulting firm in New York, and Daniel P. Cassidy, president of Cassidy Retirement Group Inc., a strategic retirement plan consulting firm in Concord, Mass., co-wrote in a commentary in Pensions & Investments in 2008, contributions to pension plans are “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 administration and Congress ought first to strengthen the economy by removing barriers like new taxes from promoting growth in investment capital, and then seek to secure better pension plans by keeping the contribution terms of the Pension Protection Act.