Discounting Pension Liabilities with the Risk Free Rate

An interesting research brief from the Center for Retirement Research at Boston College discusses certain aspects of the present state state-run pension plans.

More specifically, this brief addresses locally administered pension plans.

An eye-opening statistic reveals that half of these pension plans would be considered unfunded if they discounted the value of their liabilities using the risk free rate.

Discounting pension liabilities—particularly in the context of public finances—is a charged topic that has received quite a bit of coverage in the press and from organizations like the Center at Boston College.

While the topic may be a source of ongoing debate, the need to discount public pension liabilities with something roughly equivalent to the risk free rate seems like a no-brainer.  The pension liabilities are contractually fixed, and in many cases are backed by state constitutions.

How can these types of obligations be subject to any risk?  Further, it seems grossly irresponsible to play games with the perceived amount of the pension liabilities by using a grossly inflated discount rate.