Government Influence in Accounting Rulemaking Has Led to Understated Costs and Worse Financial Outcomes

James Naughton  |  May 14, 2024

If someone asked whether we can accurately calculate the present value, and thus accounting liability, of an annuity benefit that pays $100 per month for someone currently age 65, the answer would be a resounding yes. After all, insurance companies and sponsors of defined benefit pension plans have been providing these types of benefits since the 1930s. 

Perhaps surprisingly, however, the reported liability for the payer associated with this annuity benefit currently differs depending on the entity that provides the benefit. For a private-sector employer or an insurance company or similar financial institution, the liability will be roughly the same. However, for a public-sector employer, the reported liability will be substantially less. The reason the same annuity benefit has a lower liability for public-sector employers is not because they are able to provide annuity benefits more cost effectively than insurance companies or private-sector employers. Instead, it is due to non-sensical government accounting practices that have serious implications for government budgeting and explains why some cities today are in financially precarious positions. 

Read the full article on: ProMarket

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