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How Government Pension Assumptions Hide Trillion-Dollar Gaps
Episode 23 of The Fiscal Policy Podcast examines the delicate art of pension discount rate assumptions. Lucas and Luna dissect how a one-percentage-point change in the assumed rate of return can swing a city's reported liability by hundreds of millions of dollars. Using the case of the Illinois Municipal Retirement Fund, they walk through the math that turns a 7-percent assumed return from a forecast into a political decision. They explore why most public plans use rates near 7 percent when risk-free rates hover around 4, the incentives that keep assumptions high, and what happens when…
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