Reports indicate that some in Congress are prepared to offer versions of a "cap and tax" scheme next week. This new tax would be assessed on all fossil fuel-derived energy source in America. Because people (not businesses) pay taxes, this will be passed along to consumers and shareholders.
When you hear "shareholders," you might just be thinking of those with stock in taxable brokerage accounts, or even your IRA or 401(k) account. But there’s a whole other group of people who will also be hurt by this bill–government employees with defined benefit pension plans.
According to the Employee Benefit Research Institute, there are 2,654 defined benefit pension plans offered by state and local governments. They cover 14.5 million working participants, and 4 million retirees and beneficiaries. There are $3.3 trillion in assets, and they paid out $162 billion in benefits in 2007.
Assuming that the pension funds are 60 percent stocks and 40 percent bonds (the typical breakdown for such plans), these funds have $2 trillion invested in stocks.
Assuming the stocks break down the same way as the S&P 500 Index, here is how the following sectors directly-taxed by the cap and tax scheme break down, with the amount of assets held in the plans:
- Utilities: $73 billion (4 percent of the stock market)
- Energy: $220 billion (11 percent of the stock market)
Of course, all sectors will be hit by cap and tax, but it’s important to note that 15 percent of the entire stock market (and, by extension, 9 percent of the total value of defined benefit pension plans) will be directly-hit by cap and tax.