Barry’s Pickings Online: Retirement Policy and the 2017 Election

Art by Joe CiardielloBoth Presidential candidates, former Secretary of State Hilary Clinton and Donald Trump, have made infrastructure spending a centerpiece of their campaigns.

Clinton proposes to spend $275 billion to “fix America’s infrastructure.” According to campaign literature, her plan will “help repair crumbling bridges and roads. It will also mean world-class airports, a faster rail system, and broadband internet access for every American household.”

According to Donald Trump, “We have a great plan and we are going to rebuild our infrastructure.” Clinton’s infrastructure number “is a fraction of what we’re talking about, we need much more money than that to rebuild our infrastructure.  … I would say at least double her numbers and you’re going to really need more than that.”

Clinton says that she would “fully [pay] for these investments through business tax reform.” Trump says that “citizens would put money into [an infrastructure fund] and we will rebuild our infrastructure with that fund and it will be a great investment and it’s going to put a lot of people to work.”

That last point is key—because the magic of infrastructure spending for politicians is not so much the bridge that is being fixed but the jobs that are created fixing it. As Clinton puts it, infrastructure spending is “part of a comprehensive package to create the next generation of good-paying jobs and help American workers compete and win in the global economy.”

But—and strangely, given the alleged continued urgency of this problem—we have had over the last eight years nearly continuous infrastructure spending. It began with (relatively modest) 2009 stimulus spending on “shovel ready jobs.” But it really took off in 2012, when Congress passed the Moving Ahead for Progress in the 21st Century Act (MAP-21), which included more than $94 billion in transportation spending over two years (2013 and 2014). That legislation was funded not by a “business tax,” and indeed, most, including many Democrats believe that US “business taxes” (e.g., the corporate tax) are already too high.

Instead, it was funded in part by $18 billion in “revenue” from: (1) defined benefit (DB) plan interest rate stabilization funding relief (which reduced the minimum contributions DB plan sponsors had to make, reducing their tax deductions and thus generating “revenues”); and (2) an increase in Pension Benefit Guaranty Corporation (PBGC) premiums. Neither of these (delayed DB funding and increased PBGC premiums) is in any conceivable sense “real money.” Contributions (with interest) to fund underfunded DB plans will have to be made at some point, generating the costly (to federal revenues) tax deductions. And PBGC premiums are only fictionally part of the budget. They sit over at PBGC and can only be used to pay for the benefits in terminated underfunded plans—they can’t be used to fix a bridge.

But delayed funding and, especially, increased PBGC premiums, while they only have a pretend effect on the budget, do have real world consequences for pension policy. And, let’s note that in real life, increased PBGC premiums have generally encouraged de-risking and increased funding (to avoid the PBGC premium tax), reducing the so-called revenues these changes are supposed to generate.

MAP-21 set the pattern for the current system of transportation spending/budget deficit finance we’ve seen for the last four years. In 2013, Congress passed the Bipartisan Budget Act of 2013, closing (whatever Congress chose to view as) a “budget gap” with, among other things, another PBGC premium increase.

In 2014, Congress passed the Highway and Transportation Funding Act (HATFA), providing around $10 billion in stopgap highway spending, funded by a further relaxation of DB funding requirements.

In 2015 Congress passed the Fixing America’s Surface Transportation (FAST) Act, providing for $305 billion in infrastructure spending over five years. And then, in October 2015, as part of yet another budget compromise, to make the books “balance,” Congress raised PBGC premiums again, and extended DB funding requirements, again.

Even the lawmakers recognize that this process is reaching Kafkaesque levels of absurdity. Bipartisan legislation has been introduced to take PBGC premiums out of the budget process. And the last Administration’s budget suggested that we’d had enough premium increases in the single employer premium system.

Now we have two Presidential candidates bragging about how great their additional infrastructure spending is going to be. The most realistic outcome here—unless Clinton or Trump runs the table (which seems unlikely)—is that we will have a divided government in 2017, with no chance of either increased business taxes or a special infrastructure fund. But there will, no matter who is elected, still be a push for infrastructure spending. Indeed, it may be the highest legislative priority of 2017, because it presents the perfect pretext for government-generated “jobs.” Everyone, Democrat and Republican, is for jobs.

And the easiest way to pay for infrastructure is, still, to go raid the retirement policy cookie jar, again. Does Congress have the stomach for another PBGC premium increase? Maybe—it’s kind of like crack—a tax increase that nobody cares about, generating lots of fake revenues. If it doesn’t, then they have a little list of revenue-raising retirement policy changes they can roll out—in-plan Roth conversions, eliminating stretch IRAs, the employee stock ownership plan (ESOP) dividend deduction, or, if they need big bucks (for a really huge effort), maybe a cap on the 401(k) exclusion.

I think we—plan sponsors, providers and participant advocates, left and right—can agree on this: Congress should stop making retirement policy simply as a way to fund infrastructure spending. Pay for highways and bridges with real money. (And on that topic, if I may point out something obvious: with open road tolling, why can’t highways and bridges simply be paid for by their users?)

We must address retirement policy on its own terms. As I’ll discuss in my next column, there are real and important, and in some respects scary, retirement policy challenges we are facing. We ought to be doing something real about those rather than ripping up the system, on an ad hoc basis, simply to provide dollars for totally unrelated spending.

Michael Barry is president of the Plan Advisory Services Group, a consulting group that helps financial services­ corporations with the regulatory issues facing their plan sponsor clients. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.