The following post was originally published by the Daily Caller and can be viewed here.
Sens. John Kerry (D-Mass.) and Joe Lieberman (I-Conn.) have introduced legislation that will have dire effects on the economy, the American Power Act. The bill levies a tax on all fossil fuel- energy sources in America. People (not businesses) pay taxes—therefore, the costs won’t only be passed to consumers, but to shareholders as well.
When people hear “shareholders,” the first thought that comes to mind is people with stock in taxable brokerage accounts, or even IRA or 401(k) accounts. But there’s a whole other group of people who will also be hurt by this bill—government employees with defined benefit pension plans.
Defined benefit pensions differ from most retirement accounts because unlike traditional IRAs or 401(k)s, employers commit to paying employees a specific amount for life, beginning at the age of retirement (usually fifty-five for public employees). 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.
Public pension funds are comprised of 60 percent stocks and 40 percent bonds; public pension funds own $2 trillion in stocks.
Also assuming the stocks breakdown the same way as the S&P 500 Index, here is how the following sectors will be affected by cap and tax, with the amount of assets held in the plans: Utilities—$73 billion (4 percent of the stock market) and 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. This would have serious repercussions for the 18.5 million people covered under defined benefit pension plans.
Confirming what we already knew, that tax hikes reduce American’s wealth, the effect of the new legislation would be the immediate lowering of investment in utility and energy companies.
This is especially troubling since state and local governments, looking to increase returns, are increasingly investing in stocks rather than bonds. This legislation will only exasperate the current underfunding problems public pension plans face. Any public employee with pension funds invested in energy or utility companies will see an abrupt drop in their overall value. Columnist George Will points to Los Angeles to illustrate this point. “L.A. has conveniently but unrealistically assumed 8 percent annual growth of the assets of the city’s pension funds. The two main funds’ actual growth over the last decade has been 3.5 percent and 2.8 percent.”
Kerry and Lieberman’s cap-and-tax scheme will make it even harder for state and local governments to balance their budgets, many of which are already in debt, and continue to pay promised benefits.
Take California, which has a relatively large public sector, as an example. According to the National Center for Public Policy Research, ExxonMobil is the largest equity holder in California’s Public Employee Retirement system. As a major oil-producing company, Exxon’s value, and subsequently its stock, will be seriously affected by the new tax reducing California’s public sector employee’s retirement funds.
As a result, more tax hikes on the private sector, which is never a good thing, may be imposed to pay for the already under-funded pension plans that will be hurt if the new legislation is passed. All the cap-and-tax scheme does is make an already complicated economic problem an even more onerous one.