A few weeks ago, Politico lavishly praised bipartisanship in Washington saying “Don’t look now, but the Senate’s actually working.” The story could have been subtitled “Taxpayers, grab your wallets,” because bipartisanship in Washington usually leads to bigger government.
Today, we are learning about the latest example of bipartisan insanity as we hurry toward the fiscal cliff. As most Americans are rightly focused on the impending Obamacare court decision, Democrat and Republican leaders are quietly planning to combine a new highway bailout with a student loan bailout. All of this is to be paid for by raising new taxes and raiding private pensions. Adding to this mess, a reauthorization of the federal flood insurance program may be added to this mega-bailout bill, with a new mandate that requires more people to purchase flood insurance even if they live in very low risk areas.
Highway spending is traditionally limited to only to the amount collected in gas taxes, which go into the highway trust fund. However, Congress has so rapidly increased highway spending that they have blown through the trust fund, already requiring about $35 billion in taxpayer bailouts since 2008. Now they are pushing a new two-year highway bailout, which will likely require another $14 billion transfer of general revenue taxes to the trust fund.
The potential deal, which will extend the supposedly temporary student loan subsidies for roughly two percent of the population, will likely be paid for by reducing contributions to private pensions. The tradeoff goes like this: Congress lets businesses change the way they calculate funding requirements so that they can put less money into their pension systems, and the money they don’t put into pensions gets taxed and generates $9 billion in new tax revenue. Congress is compromising the solvency of private pension systems to get more tax dollars.
This $9 billion windfall could prove very costly. According to the Joint Committee on Taxation, the legislation would strip $36 billion away from pension contributions over the next ten years. But nothing else about these pension funds will have changed – these companies will still owe the same amount of money to the same number of people, and their same investments will still earn the same rate of return. The difference is, there will be less money available to pay benefits when they come due.
By compromising the solvency of private sector pension benefits, Congress is setting the stage for a federal private pension bailout. When companies can’t pay their retirees, they will turn to the Pension Benefit Guaranty Corporation (PBGC), a federal agency that ensures the solvency of private pensions. Last year the PBGC reported a $26 billion deficit, the 10th consecutive year of deficits. When private pensions run dry because of gimmicks like the one included in this bill, and pension benefits cannot be paid, it’s likely that taxpayers will foot the bill.
As the Society of Actuaries warned yesterday, these pension accounting gimmicks would lead to “the cost of transparency of plan funded status and potential increased consequences of plan default.” Fitch Ratings has also sounded the alarm on this scheme, stating: “we believe the proposed change could raise the risk that companies with large pension deficits could dig larger holes by using loosened assumptions to delay necessary funding… we note that short-term reductions in cash funding requirements can deepen plan deficits and ultimately lead to more long-term cash flow uncertainty.
Setting aside the reckless way Congress is financing lower student loan interest rates, the policy of artificially low interest rates is itself damaging to higher education. The federal government’s virtual take-over of the student loan industry has contributed to the unprecedented rise in college tuition.
Federal student loan debt already tops $1 trillion and the federal government is the originator of almost 93% of new student loans taken out each year.
The ballooning of federal student aid has almost certainly inflated college tuition prices. Were it not for the 379% increase (in real, inflation adjusted dollars) in total federal student aid since 1991, it is unlikely that the average annual tuition at public, 4-year colleges would have risen the full 126 percent that it did over that same period.
In a free market, the price of education would reflect the higher earning potential that the education provides. But although average tuition has more than doubled thanks to federal subsidies, since 1991 the median household income of those with bachelor’s degrees has actually slightly decreased by 0.6 percent. Meanwhile, the steep increase in tuition has shut the door for some of the very same students the government aims to help through federal aid and student loans.
Republicans were elected in 2010 with a mandate to stop the bailouts and stop the spending. But backroom deals like this that saddle our children and grandchildren with unsustainable debt for short-term political gain will squander the voters’ trust.
As I have often said, I’m willing to work with members of either party to advance the cause of liberty and limited government that our Constitution was created to protect. But as usual in Washington, bipartisanship is a code for: big government wins, taxpayers lose.Sen. Jim DeMint is a Republican representing South Carolina.