Tuesday, March 28, 2017

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Discount rates and pension plans: 98 percent of economists agree….

I realize that 98 percent sounds impossibly unified around any subject. But I find this recent survey by the University of Chicago’s IGM Economics Experts panel especially compelling. According to their survey of 39 professional economists, 98 percent agree that public sector plans understate pension liabilities and costs by using high discount rates.

Here’s the question as stated:

Question A: By discounting pension liabilities at high interest rates under government accounting standards, many U.S. state and local governments understate their pension liabilities and the costs of providing pensions to public-sector workers.

The response:

49 percent strongly agree

49 percent agree

Who was surveyed?

39 economists – from across the field –  including Richard Thaler (Chicago), Jose Scheinkman (Princeton), Robert Hall (Stanford), Austen Goolsbee (Chicago, and former advisor to President Obama), Barry Eichengreen (Berkeley), Claudia Goldin (Harvard), Alberto Alesina (Harvard) and Daron Acemoglu (MIT).

You can check out who was surveyed and their academic credentials at the site.

This principle concerning the valuation of pension liabilities is not very controversial (or even interesting) for economists as M. Barton Waring has noted in, Pension Finance. It only remains controversial among actuaries and policymakers/pension plan analysts and advisors in this one corner of the world: U.S. public sector pension plans. It is partly a matter of professional training. Economists and actuaries are using different toolkits to evaluate plans. (There are notable exceptions, see, Gold and Bader). It is also a matter of the implications of what happens when governments use discount rates more in line with the guaranteed nature of public plans. Lowering discount rates increases the necessary contribution.

But if governments are serious about offering these plans as guaranteed to retirees, then they should be especially interested in valuing them accurately.