Valuing Liabilities in State and Local Plans


Summary:

This brief sheds light on the debate between economists and actuaries over what discount rate should be used to value pension liabilities in the public sector. (6/10)

Author(s):
Alicia H. Munnell, Richard Kopcke, Jean-Pierre Aubry, and Laura Quinby of the Center for Retirement Research at Boston College
Publication date:
June 2010
Filed under:
Research Studies
Key findings:
  • What rate to use is a hot topic. The Government Accounting Standards Board (GASB) recommends the estimated return on pension assets - about 8 percent. Economists generally argue for a riskless rate - about 5 percent.
  • Reducing the discount rate would raise the unfunded liability by $1.5 trillion.
  • While a lower discount rate has a large impact on reported funding status, it does not change what pension benefits public employees, such as teachers and firefighters, ultimately receive.
  • A realistic measure of the funded status may deter plans from offering overly generous benefits when the stock market soars.
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Valuing Liabilities