Discounting Pension Liabilities: Funding versus Value

Jeffrey Brown and George Pennacchi

No 21276, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We argue that the appropriate discount rate for pension liabilities depends on the objective. In particular, if the objective is to measure pension under- or over- funding, a default-free discount rate should always be used, even if the liabilities are themselves not default-free. If, instead, the objective is to determine the market value of pension benefits, then it is appropriate that discount rates incorporate default risk. We also discuss the choice of a default-free discount rate. Finally, we show how cost-of-living adjustments (COLAs) that are common in public pensions can be accounted for and valued in this framework.

JEL-codes: G20 H55 J26 (search for similar items in EconPapers)
Date: 2015-06
New Economics Papers: this item is included in nep-age and nep-pbe
Note: AG AP PE
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Citations: View citations in EconPapers (8)

Published as Discounting Pension Liabilities: Funding versus Value , Jeffrey R. Brown, George Pennacchi. in The Impact of Reforms of State Retirement Plans , Clark and Newhouse. 2016
Published as JEFFREY R. BROWN & GEORGE G. PENNACCHI, 2016. "Discounting pension liabilities: funding versus value," Journal of Pension Economics and Finance, vol 15(03), pages 254-284.

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Journal Article: Discounting pension liabilities: funding versus value* (2016)
Chapter: Discounting Pension Liabilities: Funding versus Value (2015)
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