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P. 26
C. TODAY
How the American
Rescue Plan Helps
Businesses and
Help Themselves
By Chantel Sheaks
U.S. Chamber of Commerce
Last March, the Federal Reserve slashed allowed plans to use 90% of the 25-year average
interest rates to near-zero to support the instead of the 24-month average. This was again
economy as the world faced the COVID-19 extended in 2015, but it was set to start dropping
pandemic. No one doubted the Fed’s by 5% in 2021.
decision, but only a few realized the dire If interest rates were still 6%, this wouldn’t be a
consequences this would have on private problem. But they aren’t, and they aren’t going
companies that sponsor defined benefit back to 6% anytime soon.
pension plans. Unfortunately, because of the
time value of money, the lower the interest However, the American Rescue Plan (ARP) found
rate used to determine future payments, the a solution that helps employers help themselves.
higher the current contributions – even if That’s right, it didn’t cost the government any
the promised benefit does not change. Alas, money – in fact, it raised money. ARP solves
the effort to save the economy was about to this problem by smoothing interest rates over 25
wreak havoc on those very companies that years and allowing losses to be recognized for 15
voluntarily still maintained pensions for rather than seven years. The rate percentage will
their employees. gradually decrease, but hopefully, by then, the
economy will have recovered.
To understand this, we need to rewind to
2006 when Congress decided to tie pension
funding to near-term interest rates instead
of smoothed rates such as the old 30-year
treasury bond. There is debate over whether
long-term obligations paid out over decades
need to be tied to current interest rates or
funded at 100%. (For example, we don’t
require you to have enough money in the
bank to pay off a 30-year mortgage when you
get it).
However, in 2006 when this change was
made, it didn’t seem such a big deal when
interest rates were at 6%. However, as time
went on and interest rates went down,
Congress realized that it might not have been
such a good idea. Starting in 2012, Congress
23 AMCHAM SOUTH CHINA
How the American
Rescue Plan Helps
Businesses and
Help Themselves
By Chantel Sheaks
U.S. Chamber of Commerce
Last March, the Federal Reserve slashed allowed plans to use 90% of the 25-year average
interest rates to near-zero to support the instead of the 24-month average. This was again
economy as the world faced the COVID-19 extended in 2015, but it was set to start dropping
pandemic. No one doubted the Fed’s by 5% in 2021.
decision, but only a few realized the dire If interest rates were still 6%, this wouldn’t be a
consequences this would have on private problem. But they aren’t, and they aren’t going
companies that sponsor defined benefit back to 6% anytime soon.
pension plans. Unfortunately, because of the
time value of money, the lower the interest However, the American Rescue Plan (ARP) found
rate used to determine future payments, the a solution that helps employers help themselves.
higher the current contributions – even if That’s right, it didn’t cost the government any
the promised benefit does not change. Alas, money – in fact, it raised money. ARP solves
the effort to save the economy was about to this problem by smoothing interest rates over 25
wreak havoc on those very companies that years and allowing losses to be recognized for 15
voluntarily still maintained pensions for rather than seven years. The rate percentage will
their employees. gradually decrease, but hopefully, by then, the
economy will have recovered.
To understand this, we need to rewind to
2006 when Congress decided to tie pension
funding to near-term interest rates instead
of smoothed rates such as the old 30-year
treasury bond. There is debate over whether
long-term obligations paid out over decades
need to be tied to current interest rates or
funded at 100%. (For example, we don’t
require you to have enough money in the
bank to pay off a 30-year mortgage when you
get it).
However, in 2006 when this change was
made, it didn’t seem such a big deal when
interest rates were at 6%. However, as time
went on and interest rates went down,
Congress realized that it might not have been
such a good idea. Starting in 2012, Congress
23 AMCHAM SOUTH CHINA
