Ridiculous Ideas About Fiscal Stimulus

If I were giving awards for the most self-interested suggestions for fiscal stimulus, this one from the American Benefits Council would be among the finalists. From the Council’s president, James Klein, in its most recent press release:

“Immediate relief is essential to the preservation of thousands of American jobs. Every day that goes by without a solution means more facilities will close, more layoffs will be planned and economic growth slips farther away. One recent survey found that cash contributions to pension plans will be 400 percent higher in 2010 than in 2009 and another survey found that fully 68 percent of employers reported that unexpected cash outlays for pension plans would cause cuts outside the plan including hiring and workforce training. Do we really need any further evidence that pension funding is a jobs issue?” Klein said.

As the Council has consistently argued, an unprecedented “perfect storm” of depressed financial markets, low interest rates and new pension funding rules has artificially inflated companies’ defined benefit pension obligations. Millions of dollars that would normally go toward job creation and capital investment are being diverted into already healthy pension funds.

“To help save jobs in this country, we need to assist companies in managing these paper losses without imposing excessive conditions or requirements on the relief. This would allow companies the time and capital they need to invest in their workforce. Economic analysis shows that for every dollar of mandatory pension funding there is 60 to 70 cents of lost capital expenditures. Pension funding relief stimulates the economy, saves jobs, and does not cost taxpayers anything; in fact, relief raises money. Relief without onerous conditions should be enacted as soon as possible,” Klein said.

I have several issues with this:

1) There is nothing unique about pension plan contributions in this respect. Any temporary deferral of required payments by corporations would serve essentially the same purpose. And as I have argued elsewhere (most recently here), fiscal policy over the business cycle should be based on very different principles.

2) The pension funds are not “healthy.” They are underfunded, and that underfunding is projected to get worse. From the Council’s Jobs in Peril paper:

Watson Wyatt Worldwide calculates that defined benefit plans had an average measured funded status of 96.4 percent for the 2008 plan year, resulting in required employer contributions of approximately $37.9 billion. This funded status is projected to drop to 83.8 percent for 2010 and 76.8 percent for 2011.

I’ll say more on funding in #5 below.

3) The argument is completely asymmetric. I never take seriously any proposal that wouldn’t be advocated in reverse with comparable urgency at a business cycle peak. So until I read a press release from the American Benefits Council that says some thing like the following, this will rank as just political opportunism:

Due to the unprecedented strength of the economy, the American Benefits Council recommends on behalf of our members that they be required to shorten the amortization period on their pension underfunding. This temporary measure will help keep the economy from overheating by putting downward pressure on aggregate demand and force all pension plan sponsors to keep their plans well funded heading into the next economic downturn.

Keep dreaming.

4) The so-called perfect storm was not “unprecedented.” The same thing happened in the early part of the last decade after the internet bubble burst. Pension fund assets, invested largely in equities, collapsed. To head off economic decline, the Fed aggressively lowered interest rates. That the pension funding rules are now tighter is in direct response to the abysmal job that some pension plan sponsors do in keeping their pension plans funded. It was a rare instance of the federal government acting prudently over the last decade.

5) Picking up on the funding issue from #2, pension plan sponsors have ample opportunity to match not just the level of their assets to their liabilities but their risk and duration characteristics as well. Pension plan obligations look like bonds — promises to pay annuities at some point in the future. So why do pension funds typically invest so heavily in stocks rather than bonds? I suggest that it is because the plan sponsor keeps the upside if stocks do well and the PBGC or other creditors take some of the loss if stocks do poorly and the company goes bankrupt. Pension funding requirements are the (currently inadequate) defense against this moral hazard. Surprise, surprise — a trade organization for pension plan sponsors would like to weaken those defenses by keeping underfunded plans underfunded for a few more years.

6) The American Benefits Council doesn’t need the federal government in order to lower the pension plan obligations of its members. All those members need to do is to renegotiate with the workers to reduce the pension benefits they have been promised to the point where the existing fund is enough to cover the present value of the lower obligations. And the workers would tell them what they could do with that suggestion. The workers would rightly point out that the sponsor’s investment decisions are the sponsor’s problems, not theirs. So why would we want to make them the PBGC’s?

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