Highway robbery? Your pension could be paving roads

The next time you drive down a newly paved road, it just might be that the money to pave that road came from your pension fund, although by a slightly circuitous route. How can that be? Let me lay the groundwork.

According to the well-respected newspaper Pension and Investment News, the country’s 100 largest pension plans were underfunded by a staggering $122 billion last year. And while that’s a frightening number and a tenuous situation, it’s actually good news.

Again, how can that be? Well, as of a result of the recently improved investment climate, that number represents a huge improvement over 2012, when the plans were underfunded by more than $300 billion. So the gap is definitely closing.

Over the years, our nation’s bookkeepers have used a variety of accounting tactics that are somewhat gimmicky. The objective is often to rob Peter to pay Paul, and in this instance, it essentially hijacks money from your pension plan and puts it into Uncle Sam’s tax coffers.

Earlier this month, the U.S. House of Representatives passed the Highway Trust Fund Bill to provide some very needed dollars for highway funding. The Highway Trust Fund, it seems, had run out of gas.

Fear not. Your pension plan has come to the rescue. The bill’s creative accounting, signed into law by President Obama, is called “pension smoothing.” The objective of pension smoothing is to keep the Highway Trust Fund going until next summer. But only until next summer.

Without trying to make every reader an expert in the exciting field of accounting, let me keep the basics of pension smoothing simple. In essence, the government is allowing companies to defer making pension plan contributions with the commitment to make those deposits in the future.

Keep in mind that pension fund managers manage their funds very long term in order to make the money last for a large number of working and retired employees. Their definition of long term utilizes mathematical concepts such as time value of money, future value, inflation and a few other mystical statistical equations.

With pension smoothing, the government is allowing pension fund managers to defer current contributions into their pension funds, which, essentially, are your pension funds.

So, how does this deferment contribute to highway funding? In simple terms, it puts more dollars into corporations. In fact, it’s estimated that corporate America will benefit to the tune of more than $50 billion.

More money for corporations means more tax dollars for Uncle Sam. In this case, those “extra” tax dollars are being used to add nearly $11 billion to the Highway Trust Fund.

In the interest of full disclosure, the Bill also funnels money into the Highway Fund from customs fees and the rarely mentioned Underground Storage Tank Fund. But that doesn’t affect your pension.

Pension smoothing does. While I personally don’t like accounting gimmicks, I have a bigger problem with pension smoothing. It’s only a temporary measure.

Rather than addressing the issue, it kicks the problem down the road. Something that our leaders in Washington have become quite good at doing. To fix the problems long term, we need serious tax reform, not just patchwork solutions.

Pension smoothing may have not made the headlines today, but it may be a problem for many pensioners down the road.