Your tax dollars are hard at work once again!
From Accounting Today:
“The Internal Revenue Service’s decision not to update mortality assumptions to reflect today’s higher life expectancy could help corporate pension plan sponsors save at least $18 billion in 2016 as they continue to calculate minimum funding contributions according to outdated models.” That is just for 2016. The article goes on to conclude, “…market participants had widely expected the IRS to adopt the new mortality tables issued by the Society of Actuaries in 2014, which would increase sponsors’ projected benefit obligations between 4 to 8 percent, or approximately $126 billion.” So, the total shortfall is actually $126 billion.
This decision by the IRS, with a current PE ratio of 20 on the S&P 500, translates into saving not only $18 billion in 2016 profits, but $360 billion (20 X $18 billion) in current valuation for many of the largest, most profitable, and most highly capitalized companies in the world. In fact, $360 billion makes up almost 2% of the total market cap of the entire S&P 500. And, of course, for the individual companies that sponsor plans and are directly impacted by this decision, the impact would be far greater.
The IRS is “evaluating” the new tables. But, really, how long does it take to evaluate a life expectancy table done by a group of actuaries? I don’t know, 60 seconds? Intuitively, we know people are living longer, right? This is not rocket science, but I’m sure it will cost taxpayers millions of dollars as the “evaluation” will not be done until 2017. In the meantime, companies will continue to utilize 15 year old information. In the end, and as the article points out, it is ultimately the pension beneficiaries that will pay dearly in the form of lower pension buy-outs and/or lower benefits over their lifetimes. As always, there is no free lunch. In this case, the shareholders are benefiting at the expense of the pension holders. Even more disturbing, is that a government agency, the IRS, is behind this scheme.
But, why is the IRS siding with shareholders? No doubt, a large lobbying effort on behalf of plan sponsors lead, in at least some way, to this decision. But, could there be an even simpler explanation? The marginal federal corporate tax rate for most large, profitable, companies is 35%. A contribution of an additional $18 billion in to pension plans in 2016 would decrease taxable income by $18 billion, resulting in $6 billion less in tax collections by the federal government in that year. Contributions to the pensioners are deferred, resulting in no additional tax collections in 2016. Looks like the IRS just “saved” $6 billion in 2016! And, that, ladies and gentlemen, is why the IRS sided with shareholders.
And, Sir, how do you feel about what has just happened?