TY  - JOUR
AU  - Brown, Jeffrey R
AU  - Pennacchi, George G
TI  - Discounting Pension Liabilities: Funding versus Value
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 21276
PY  - 2015
Y2  - June 2015
DO  - 10.3386/w21276
UR  - http://www.nber.org/papers/w21276
L1  - http://www.nber.org/papers/w21276.pdf
N1  - Author contact info:
Jeffrey R. Brown
Gies College of Business
University of Illinois at Urbana-Champaign
1206 S. Sixth Street
Champaign, IL 61820
Tel: 217/333-3322
E-Mail: brownjr@illinois.edu

George Pennacchi
College of Business
University of Illinois
4041 BIF, Box 25, MC520
515 E. Gregory Drive
Champaign, IL 61820
Tel: 2172440952
Fax: 2172443102
E-Mail: gpennacc@illinois.edu
M1  - published as Jeffrey R. Brown, George Pennacchi. "Discounting Pension Liabilities: Funding versus Value," in Robert L. Clark and Joseph P. Newhouse, organizers, "The Impact of Reforms of State Retirement Plans" Journal of Pension Economics and Finance, Vol. 15, issue 3 (Cambridge University Press) (2016)

AB  - 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.
ER  -