We’re learning today that when a government runs out of money to spend, among the first places it turns to for more are the trust funds it sets up to provide for social insurance.
For example, consider the so-called “social” insurance the government provides for private sector pension plans. Here, in the event a pension fund fails and is no longer able to make promised payments to a company’s retirees, the government’s insurance fund is supposed to kick in to keep those payments going.
As you can imagine, it takes a lot of money for the federal government to insure pension and retirement funds in the event if they should fail. The government’s Pension Benefit and Guarantee Corporation raises that money by charging private pension plans a premium, with the money coming into the U.S. Treasury.
It’s an irresistible target for politicians looking to spend more for their own political gain, who will do whatever they can in their pursuit of that aim, no matter the potential downside risk. From their perspective, so long as the payouts to support the pension payments are less than the money the fund takes in, it’s like free money for them to spend on whatever they might choose.
In fact, that’s almost exactly what has happened with the Transportation appropriation bill just passed by the U.S. Congress and signed by President Obama. In addition to appropriating money for thousands of transportation projects, the usual grist mill for politicians looking to spread taxpayer dollars around their districts, the bill also contains a special provision tucked inside it at President Obama’s insistence to keep student loan interest rates from doubling for one more year with the expiration of a 2007 subsidy in July 2012.
Never mind that student loan programs really don’t belong anywhere inside an appropriations bill for transportation, it has turned out that the politicians raided the private sector pension guarantee fund it maintains to ensure that retirees’ pensions will continue to be paid should their former employers’ pension funds set up on their behalf fail. Reuters’ David Indiviglio reports:
Keeping student loan rates low is requiring some devilish financial engineering from U.S. lawmakers. To cover the cost of the education subsidy, they’re blessing some aggressive accounting for government-backed pensions. The plan could put taxpayers on a bigger hook for both retirees and graduates.
The hocus-pocus is tucked away in a transportation bill, passed as most Americans were gearing up for Independence Day festivities. Federal spending on highways and related infrastructure has grown too large to rely on the gasoline tax alone. So to cover the $14 billion hole and another $6 billion to reduce student borrowing rates, Washington essentially raided its pension guarantee fund.
So we see that the politicians’ treated the government’s pension guarantee fund like it was free money, just as if the fund were taking in more in premiums than it would ever have to pay out.
Unfortunately, the Pension Benefit Guaranty Corporation has been having to pay out more money than it takes in through those premiums. In this year alone, the PBGC was already running a $26 billion deficit thanks to the need to make payments to the retirees’ covered by a number of pension plans that failed during the recent recession and its aftermath. Consequently, the U.S. Treasury is already borrowing money today for the PBGC to make good on its obligations to the retirees impacted by today’s failed pension plans.
Worse, the risk to today’s pensioners has increased that they will likely not be made whole should their pension funds fail as today’s deteriorating economic environment takes its toll going forward.
As Nathan Harden, editor of The College Fix, described it in a recent op-ed in the New York Post, the politicians are robbing from the elderly to give money to the young, for apparently very little other than political benefit:
What has America gained by putting the pension system at risk? Not much. Student-loan debt has reached an all-time high of more than $28,000 per graduating student. But while low interest rates may help young people temporarily, low rates have a downside—they encourage students to take on even more debt. Plus, rates are still set to rise next year, after the election.
Congress and the president have done America’s retirees a great disservice. By robbing the pension fund and lowering accounting standards, the student-loan bill steals from seniors tomorrow to achieve a politically expedient goal today.
The president has made the student-loan issue a signature issue of his re-election campaign. But he never told us that lower loan rates would come at a cost to the financial security of the elderly.
In a sense, today’s politicians are gambling that the bill for playing political games with the money meant to protect retiree pension payments will never come due. At least, for one more year, when perhaps a new budget crisis will compel them to tap the other trust funds it has established to provide other “social” insurance benefits for the same purpose.
Source: Office of the City Controller, Houston, Texas