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How Companies Are Affected by “Pension Smoothing”

The House and Senate are fighting over how to get money into the Federal Highway Trust Fund, and the fight has boiled down to “pension smoothing,” a budgetary gimmick.

The Federal Highway Trust Fund is set to run out of money. If Congress does not put more money in the fund by Friday, the federal government will start reducing its payments to states for highway projects, and some construction might stop.

The answer: Pension smoothing. Here’s how it works: You let companies set aside less money in their pension plans. When they put less in their pension funds, they report higher profits and pay more in corporate tax. That generates a little extra revenue, which you can put in the highway fund. Over the long run, this policy doesn’t actually generate any added revenue, since in later years, companies will have to increase their pension contributions to make up for what they didn’t set aside today, and their tax payments will go down. But since Congress measures the costs of laws over a 10-year window, the added revenues in the near term count, and revenue losses far in the future don’t.

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