Chances are you've never heard of the budget gimmick known as "pension smoothing." We'll try to explain.
1. What is pension smoothing?
It's one of the tactics lawmakers are using as a temporary patch for the Highway Trust Fund. It allows employers that offer traditional pensions to set aside less money for future retirees. That makes the companies appear more profitable in the short run so they — or their employees — pay more money to the government in taxes. A bill approved by the House Tuesday would use $6.4 billion of this additional tax revenue to help fund transportation improvement projects between now and next May. A separate, Senate version uses pension smoothing to raise $2.7 billion.
2. Why do critics call this a budget gimmick?
Critics highlight several problems with this tactic. It uses a decade's worth of extra tax money from the pension adjustment to fund just nine months of transportation work — a good (or bad) example of spend-now-pay-later budgeting. While the government collects higher taxes up front, it could lose tax money in the future if companies' pension obligations rebound. This isn't fully reflected in the government's official scorecard, though, because the scorecard ignores budget effects more than 10 years out. Finally, by allowing companies to put less money into their pension funds, the tactic raises the risk that some funds may go broke, leaving both taxpayers and retirees on the hook.
3. Don't we already pay for road repairs every time we buy gas?
Gasoline taxes are the main source of revenue for the Highway Trust Fund, but the tax rate hasn't budged in more than 20 years. Meanwhile, the cost of building and repairing roads and bridges has continued to rise with inflation. The 18.4 cents per gallon that motorists pay today has lost 40 percent of its purchasing power since the rate was set in 1993. What's more, thanks to improvements in fuel efficiency, Americans can now drive more miles with every gallon of gas they buy, so the wear and tear on roads increases, even as pennies paid at the pump stay the same.
4. I thought you said "pension smoothie." How would you make one of those?
Take a tax-averse political culture, stir in nutty budget accounting, add a frozen legislative process, and throw them all in the Congressional blender. Serve immediately and drive away fast before the bill comes, taking care to steer around any potholes.
ROBERT SIEGEL, HOST:
From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.
AUDIE CORNISH, HOST:
And I'm Audie Cornish. House lawmakers are considering a temporary patch for the Highway Trust Fund. The fund's been running low on cash, which could bring many road improvement projects to a standstill as early as next month. President Obama has endorsed the temporary fix, even though he says what's really needed is a long-term funding solution.
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PRESIDENT BARACK OBAMA: Congress shouldn't pat itself on the back for averting disaster for a few months, kicking the can down the road for a few months.
CORNISH: The house legislation provides a $11 billion to keep that road in a little better shape between now and next May. NPR's Scott Horsley reports much of that money would come from a budget maneuver called pension smoothing.
SCOTT HORSLEY, BYLINE: If you've never heard of pension smoothing, don't feel bad, neither had any of the tourists we spoke with outside the Capitol, including Marie Suggs, Franklin Ellis and Lisa and Sam Verhovek.
LISA VERHOVEK: No, I've never heard of the term pension smoothing. Have you?
SAM VERHOVEK: I've heard of pension increasing.
MARIE SUGGS: Make it easier to get your pension? I don't know if that's it or not.
FRANKLIN ELLIS: Is that like rounding up to the next highest number - smoothing every thing out? I don't know.
HORSLEY: And again, it's pension smoothing, not a pension smoothie.
Actually, pension smoothie might be a more accurate name for this. Take the fruit of a tax-averse political culture, some nutty government accounting, a frozen legislative process, and throw them all in the congressional blender.
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LEN BURMAN: A cynic would say it smoothes out the requirement for legislative decisions.
HORSLEY: Len Burman is a professor at Syracuse and director of the Tax Policy Center here in Washington.
BURMAN: There was a time when policymakers were basically willing to just say, OK, you want these services, you can pay for them. And now they're saying, you want these services. They're really popular, and we'll pretend to pay for them with smoke and mirrors.
HORSLEY: Here's how the smoke and mirrors work in this case. Congress tweaks its formula, so companies that offer traditional pensions don't have to put as much money aside for future retirees. That makes the companies look more profitable in the short run, so they pay higher taxes - nearly $6.5 billion or more over the next decade. Over the longer term, of course, those companies may have to make up those pension payments. So years from now, the government's tax revenues could shrink. That's far enough in the future, though, that it doesn't count in today's congressional scorekeeping. Burman says lawmakers are spending the extra tax money now without thinking about the future.
BURMAN: It's a terrible deal all around. Basically, what they're doing with this pension smoothing is they're borrowing the money from American companies. And they're basically making a really risky loan because by those companies making smaller payments to their pensions, they're more likely to have their pension plans go bust.
HORSLEY: If that happens, both tax payers and retirees could pay a price for the short-term highway fix. Experts say there's room for debate over how companies' pensions contributions should be calculated. James Klein, who represents big employers as president of the American Benefits Council, argues there's little danger in this smoothing formula for future retirees. But he admits Congress got there in a roundabout way.
JAMES KLEIN: I'd like to believe that the change is based upon an understanding of the need for stable pension funding. I suspect that, as much as anything else, that it's based upon the fact that it gets scored as a revenue raiser and therefore can be used to offset other expenses.
HORSLEY: The House bill also relies on extended customs fees and money set aside for LUST - that's Leaking Underground Storage Tanks - to fill the hole in the Highway Trust Fund, at least temporarily. Watchdog Maya MacGuineas of the Committee for a Responsible Federal Budget says lawmakers would be better off steering clear of such tricks.
MAYA MACGUINEAS: There are plenty of options, whether you want to raise taxes, cut some transportation spending, or do a little bit of both, to actually finance this highway spending in a reasonable and honest, straightforward way.
HORSLEY: So far, though, a Senate proposal that would fix the trust fund permanently with higher gasoline taxes has stalled. On the bright side, at least our Capitol tourists, Sam and Lisa Verhovek, have learned a new phrase - pension smoothing.
S. VERHOVEK: Sounds mellow and nice, but...
L. VERHOVEK: Pension smoothing...
S. VERHOVEK: It sounds like it's a budget gimmick.
L. VERHOVEK: Yeah, absolutely sounds like a budget gimmick.
HORSLEY: Just don't let this ice cold gimmick give you a brain freeze. Scott Horsley. NPR News, Washington. Transcript provided by NPR, Copyright NPR.