Discounting Trillions of Dollars in Pension Obligations: A Better Alternative to Using the Expected Return or Risk-Free Rate

Tiemen Woutersen ()
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Tiemen Woutersen: The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise

No 204, Studies in Applied Economics from The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise

Abstract: This paper proposes a new discount rate that pension funds can use to discount their future obligations. If the payouts of a pension fund depend on the return of the fund's assets, then neither the risk-free rate nor the expected return is an equitable way to discount future liabilities. Using the newly proposed rate, the expected utilities of a particular stream of payments are the same in each period. This proposed rate is higher than the discount rate that is used by some pension funds but lower than the rate that the U.S. States are required to use.

Keywords: Discount rate; Pension fund obligations; valuation future obligations (search for similar items in EconPapers)
JEL-codes: G20 G28 H50 H55 H60 (search for similar items in EconPapers)
Pages: 8 pages
Date: 2022-03
New Economics Papers: this item is included in nep-age and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jhisae:0204

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