Purchasing Power: From Smooth Roads to Pension Smoothing

I recently wrote about the problem of funding the Highway Trust Fund, which points to a drop in purchasing power and the utter irrationality of governments, the economy, and markets.

As a quick refresher, this account, which is used to maintain and expand American roadways, receives tax revenue based on fuel sales. The current structure of the funding has a couple of big issues. Not only is the tax not indexed for inflation, but also Americans are using less fuel per mile traveled.

The way it stands, the fund cannot possibly meet its obligations, and since 2008, has run out of money every year, requiring an infusion of cash from the general funds of the U.S.

So here comes Congress to help… which should scare us all. Our elected officials deserve credit for recognizing that a problem exists, but the accolades stop there.

The best structures for taxes and fees are those that clearly match up uses and benefits with expenses. This would be like hunting and fishing license fees being used to fund state Wildlife and Game departments. In this sense, the current fuel tax that is used to fund the Highway Trust Fund directly associates the use and benefits with the cost. So far, so good.

A current proposal in the House of Representatives aims to move billions of dollars to the fund to shore up its finances, but doesn’t include any new fuel or use tax to pay for the funding. Instead, the proposal calls for pension smoothing.

This is a financial sleight of hand that allows private companies to average their pension balances over several years, which can knock out some bad years and make current balances look better than they actually are.

Using the smoothed approach, companies can make smaller pension contributions than would otherwise be required. Smaller pension contributions (which are tax deductible) lead to greater profits, which increase corporate tax revenue.

At this point, you should be shaking your head in disbelief, just as I am.

Our elected officials are smart enough to jump through all the hoops required to get to Washington, and then the best they can do to shore up the Highway Trust Fund is an accounting gimmick? Really?!

What’s so perplexing is that if this pension smoothing is such a good thing for everyone — pensioners, companies, and taxpayers — then why is it not standard practice? Shouldn’t the U.S. coffers receive all funds due every year?

So either our illustrious leaders are failing to properly account for pensions in other years where smoothing isn’t used, or they’re simply giving companies an unwarranted pass on pension funding in order to funnel money somewhere else without having to do any real work.

And it gets better.

There is an amendment ready in the U.S. Senate to be attached to any funding bill that will require a portion of proceeds from pension smoothing to go to coal miner pension funds. At some point, we’re going to need a flow chart for all this.

To fund road construction, we allow companies to tinker with their pension balances and returns, so that profits get a boost, resulting in more corporate taxes, and a portion of those taxes will have to flow to a small group of union pension plans for coal miners. Yep, that makes a lot of sense.

It’s as if no one in government learned anything from the financial crisis, or from the incredible restructuring of the economy!

Smoothing pensions results in less funding. How can that be a good thing?

Do those covered by the pensions think their companies should pay the funds to the U.S. government as taxes, or would they rather see a bigger balance in the pension fund so that their benefits are more secure?

And did anyone note the irony of short-changing corporate pensions on one hand in order to fund a failing pension (probably from underfunding as well as structural changes) on the other hand?

With politicians falling over themselves trying not to create sustainable funding for necessary programs, it’s hard to see how our economy can ever regain solid footing.

With poor ideas like these floating around, we’ll keep careening from one financial disaster to the next.

Rodney

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Categories: Purchasing Power

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.