Government Pension Reimbursements for Private Companies ... When Will the Nonsense Stop?

I recently came across another (and sickening) way for government officials to charge taxpayers for unanticipated expenses incurred by certain private sector defined pension benefit plans.

These excess and unplanned government expenditures result when government defense contractors' pension expenses incurred are higher than expected or anticipated.

Here's how it works. When the actual returns on pension investments are lower than the assumed rates of return, pension expenses are of course greater than projected.

In that case, the contractor bills the government, and the government pays the extra tab. That means the taxpayer pays extra for defense contractor pension plan investment shortfalls.

This "cost plus" feature of government contracts is archaic and inappropriate, to say the least. It would be the equivalent of a private sector company billing its customers extra when the company's pension expenses turn out to be higher than planned due to pension fund underperformance resulting from a weak stock market.

Can't you just see a supplier company to Wal-Mart sending Wal-Mart a bill and charging more after the fact, because the supplier's pension plan performance was less than expected? Neither can I.

Dear Committee: Main Street Says Look at Pensions puts it this way:

"The government also promises to help defense companies shore up their pension funds when they become underfunded. Many of these funds have lost money in recent years in declining financial markets or on bad investments, so the bill for taxpayers has been growing.

Considering how much ordinary Americans have lost in their own retirement accounts — losses that the government does not cover — reimbursing contractors looks like classic corporate welfare.

These reimbursements are considered a cost of performing work under the terms of the contracts the companies sign with Uncle Sam. The expenses that the companies recover are allocated to the business units that do the contracting work and are determined each year based on actuarial assumptions."

The article later goes on to summarize the totally unfair situation in which the taxpayer is placed, especially if he happens to be employed in the non-defense private sector:

"Providing a government backstop on pensions creates perverse incentives for contractors. They would be encouraged to underfund their plans, which would contribute to higher earnings. It also seems unfair to allow some profitable corporations to bill taxpayers for pension and retirement benefits while requiring others in the private sector — albeit a dwindling number — to pay the freight themselves.

Asking the taxpayer to cover the costs of retirement benefits at government contractors may have been justifiable 40 years ago, when pensions were a standard at many companies. But in today’s world, this practice is not only quaint, it is an outlier."

Trying to make lemonade from lemons, why not have an immediate makeup provision for all government funding shortfalls as they occur? Asking taxpayers to make the pension fund whole immediately after the fund's underperformance in any particular year would crystallize the issue in real time rather than delay facing it until years in the future.

If taxpayers were asked to pay up immediately to make up for investment shortfalls, they would quickly ask the question WHY?.

And there would be no good response forthcoming from the government public sector. At that point taxpayers would likely insist that this unfair situation be remedied rather than see their taxes increased to make up the shortfall.

To repeat, why not force the government to implement taxpayer surcharges or additional payment obligations to properly fund state and local public employee pension funds when assumed investment returns are less than expected in any one year? If we did that, taxpayers would see immediately the cost they're being asked to assume in order to give public employees (employees of defense contractors, too) a most generous and somewhat unique guaranteed pension benefit.

The private sector employed taxpayers would logically wonder why they're expected to guarantee the public employee's pension benefit, when the taxpayers' own retirement benefit plan is not nearly as generous. That's because the taxpayers' private sector retirement plan is likely to be a 401k plan where the taxpayers' future retirement income is unknown until actual retirement and will not be guaranteed by anyone.

To make it even more ridiculous, maybe we should just make the taxpayers reimburse all private sector plans for unanticipated pension expenses resulting from lower than assumed pension plan investment results over time.

Of course, there's one little problem with all this giving. Where the money would come from?

But isn't that already the problem with all government provided and currently vastly underfunded public sector pension plans? I think so.

This is all pretty crazy stuff, of course, but unless and until taxpayers start insisting that government officials and their union negotiating counterparts (along with defense contractors and others) begin to act like responsible adult fiduciaries with taxpayer money, the situation will only get worse.

That we certainly can't afford to wait and see.

Thanks. Bob.