Tax Break Allows Companies to Top Off Pension Funds
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Your Money Briefing. Money and market stories from The Wall Street Journal. I'm J.R. Whelan in New York. Companies that have not been keeping up with funding their pension plans have a chance to catch up and catch a tax break. We'll have details in a moment. First, these money headlines. The surge of retiring baby boomers has resulted in fewer workers available to support the elderly. That's a shift that will add to strains on retirement programs such as Social Security and sharpen the national debate on the role of immigration in the workplace. The U.S. Census Bureau's old age dependency ratio found that in 1980, For every 100 Americans between 18 and 64, there were 19 who were over the age of 65. That number jumped to 25 last year and is expected to further climb to 35 by the year 2030.
And the Wall Street Journal Real Estate Bureau reports that former Sun Microsystems CEO Scott McNeely and his wife, are listing their sprawling Palo Alto, California estate for $96.8 million. The 28,000-square-foot four-level estate sits on more than 13 acres and is partially built underground. With a 4,700-square-foot gym, a 7,300-square-foot ice hockey rink, and a 110-yard golf practice area with an artificial turf green, a grass green, and three sand traps. McNeely sold Sun Microsystems to Oracle in 2010 for $7.4 billion. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. For companies with underfunded pensions, they have an opportunity to top off those funds and get a tax break in the process.
Wall Street Journal reporter Vipal Manga joins us via Skype to discuss. So, Vipal, this has to do with an element in the new tax law kicking in that will affect the retirement contribution deductions. Is that right?
Yes, it's a quirk of pension funding law and the tax law. So the way it works, companies that have underfunded plans have until mid-September to make a contribution and credit it for 2017. Now, in 2017, the tax rate was 35%. So they can book a 35% deduction if they contribute before the mid-September deadline. If they contribute after that, the end of September, say, they would only get a 21% deduction So companies are really ramping up their 2017 contributions because of that.
And you've heard from companies that they're going to take advantage of this opportunity. I mean, those are sizable numbers when you consider those two percentages.
There's a lot of companies that are really rushing in. Companies like Verizon, Deere & Co., the maker of John Deere equipment, Kellogg, Lockheed Martin, all told, the estimate is something like $90 billion of extra contributions this year, which would be close to a record. Last year, there were $81 billion, which in itself was a 30% increase from the year before. So companies really see the opportunity and they're taking advantage.
And this opportunity will help alleviate underfunding of pension plans that has been going on in corporate America in some places. In your story, you mentioned that some plans were less than 75% funded.
Pension math is really complicated. But after the financial crisis, what basically happened was the value of the assets used to fund the pension obligations collapsed. So funds did find themselves 75 percent funded, meaning that the value of the assets couldn't cover the obligations that they had. And this continued through eras of low interest rate for years. And now we're finally starting to see some relief from that. Higher interest rates really helps shrink the obligation that pension funds have. The equity markets have been roaring along. And then on top of that, you have all this extra money coming in through the voluntary contributions. So they're about 90% funded on average.
And while federal law allows companies to deduct contributions to pension plans from taxable income, companies also have to keep those pension funds well-funded.
Well, in theory, they do. Basically, you have seven years to fully fund your pension plan, but it's... much more complicated than that. Companies have looked for a lot of relief, and they've gotten some temporary relief from Congress through various legislation that's passed in a few years.
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