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Discount rates for government pensions – and Social Security

June 14, 2017

In recent years, a growing number of critics have called on state and local governments to lower the interest rates used to discount unfunded retirement benefits promised to employees.  This would significantly increase the estimates for the present values of the liabilities – which already look daunting. 

Some critics argue that governments use overly-rosy estimates of future returns for the investments supporting pensions and other benefits.  Given that those benefits are legally guaranteed in many states, the argument goes, risk-free Treasury rates – which are much lower than the return assumptions -- should be used to discount the liabilities.

Consider this debate in light of federal government pension and other retirement benefits, and how our federal government accounts for those liabilities – and for “Social Security.”

In the latest financial report of the U.S. government, the Department of Veteran Affairs recorded a massive $378 billion revision – leading to an extraordinary cost – given changes to its actuarial assumptions for veteran retirement benefits.

A more fundamental issue lies under this revision.  What discount rate does the federal government use for its own employee retirement benefit programs?  How does that compare to the discount rate used for unfunded Social Security obligations?

The federal government chooses to include $7.2 trillion worth of employee and veteran benefits payable as liabilities on its balance sheet.  At the same time, the federal government chooses to exclude the present value of unfunded Social Security obligations on its balance sheet.  It argues that the government can change the law, and the Social Security benefits, and therefore those aren’t really hard liabilities like the liabilities to its own employees.

This would seem to imply that government obligations to its employees are senior – and less risky – than obligations we might (or might not) be owed on Social Security.

This raises some important issues. 

One question that arises is -- what discount rate does the government use for Social Security, compared to the discount rate for its own employees?  

Longer story short, the government uses a significantly higher discount rate – other thinks equal, leading to a lower reported liability – for the present values on government pension benefits, than the discount rate it uses for Social Security present values. 

Despite the fact that the government tells us peasants that we will get those Social Security benefits if and when the government decides to pay them to us.

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