Valuing Liabilities in State and Local Plans

Alicia H. MunnellJean-Pierre AubryLaura Quinby Richard W. Kopcke

SLP#11

The brief’s key findings are:

  • What rate to use to discount public pension liabilities is a hot topic.
    • The Government Accounting Standards Board 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 greatly impacts reported funding status, it does not change what pension benefits teachers and firefighters ultimately receive.
  • And any change in funding policy would have to wait until the economy recovers.