Pensions: Another discount rate illusion | The Economist: " . . . Some states have laws - even constitutional amendments - designed to protect public pensions. Now that may change in future, but until it does, these are pretty watertight commitments. (For those interested, the AEI has a detailed paper on the legal status of pension promises. as well.) As Messrs Biggs and Smetters write
the discount rate used to value future pension liabilities should reflect the fact that pension funds are guaranteed, even if the return on a pension's investments are not. More formally, the discount rate applied to the liability should be based on the risk of the liability, not the risk of any assets used to fund any liability.. . . anyone in a DC or 401(k) plan who seeks to guarantee their pension via buying an annuity will find that the cost of buying a given income has risen; put another way, the same pension pot buys a smaller income. In short, the increased cost of providing pensions shows up everywhere but in the US public pension market. And that is just wrong."
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