Pension Smoothing – The Budget Gimmick That Will Not Die
Alex Brill and Alan D. Viard | AEIdeas
The bipartisan infrastructure bill approved by the Senate on August 10 includes a number of budget gimmicks that help make it look fully “paid for.” One of the gimmicks is pension smoothing, which allows private companies to make smaller contributions to their defined-benefit pension plans, thereby endangering the plans’ financial viability over time.
Companies with defined-benefit pensions make contributions that are invested to finance future benefit payments to retirees. When interest rates are lower, invested contributions will grow more slowly, and companies are therefore normally required to make larger contributions to ensure that enough money will be available for future benefits.