The Logic of Pension Valuation
In this policy document, the discount rate used to value pension liabilities has been at the crux of the raging debate over the cost and riskiness of public retirement systems, which manage trillions of dollars of financial assets. These systems carry even more trillions of liabilities with broad-reaching implications for public employees, governmental budgets, taxpayers and, ultimately, the health of the entire economy. While economists do “almost unanimously disagree” with GASB principles, implications that there is a consensus among financial economists on what should replace those principles are, at best, misleading. The proper response to rising retirement costs is not one that threatens to tear the social fabric or make governmental budgeting nearly impossible. Further reforms in accounting rules and pension-investment regulation would go a long way to providing a gradual adjustment to new economic realities and putting the public fiscal on a firmer footing in the longer run.