Pension Smoothing Policy - Essay Example

According to the author, Vipal Monga, Barack Obama signed the $10.8 billion transportation bill. However, he did not provide concrete assurance of the accounting tactic. This puts the financial position of pension companies at stake. In addition, this is controversial since the move could undermine the government's efforts to support, by placing against something solid or rigid, the pension system. As a result, workers worry about the strain the tactic will put on other government agencies designed to protect the retirement of workers.

The policy makes companies pile up pension bills. In the end, companies struggle to keep up with the mounting bills. It, therefore, becomes hard for them to compensate their clients ending up losing customer trust. They become insolvent and unable to meet their obligations to retirees down the road (Monga, 2).

The decline in interest rates increases the present value of the deferred pensions. This increases the corporate pension deficit since the monetary value of money decreases with time. This is confirmed by Millan who asserts that the largest pensions in the US have accrued up to $252 billion in funding deficiency, which has shot up by $66 billion within one year.

Furthermore, Pension Benefit Guaranty Corporation encounters significant financial challenges. It is funded by premiums paid by pension plans that depend on how many beneficiaries are in a plan. However, those premiums are not enough to cover the costs. When the trust funds are finished, the most likely solution will be a transfer from general revenues, meaning that taxpayers will incur the bill (Monga, 2).

Financial management and accountancy for a company are fundamental. With the implementation of the policy, corporations are compelled to channel their cash to activities they had not planned for. For instance, International Paper Company had set aside $ 1 billion to fund its $12.5 billion plan. With this policy, the money had to be put into other investments and projects not because they wanted but because they did not have a choice.

In addition, the policy is based on assumption and not reality. For instance, the highway bill, though supported by large business groups, simply allows companies to base their pension liability calculations on the average interest rate over twenty-five years, instead two. The twenty-five years average is larger and more biased (Monga, 3).

In conclusion, the scheme is undesirable because its purpose is to delay pension payments yet they will be paid at some later date. On the other hand, retirees suffer since some of them do not have jobs to sustain them yet their money is used to pay for unrelated expenses.