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El Monstro's avatar

Doesn’t CalSTers offer healthcare to retirees? Why does SFUSD offer duplicative benefits?

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John C's avatar

With respect to your second footnote....

There’s a better argument that includes "the purpose of the measurement." The choice of discount rate should align with why the liability is being measured in the first place.

For example:

For plan funding purposes, like those governed by GASB for public plans or ERISA for private plans, the goal is to assess long-term sustainability based on the plan’s ongoing investment strategy. In this context, using the expected return on assets is consistent with the plan’s ability to invest over decades and meet obligations as they come due.

For plan termination purposes, such as in the case of private-sector plans being shut down and liabilities transferred to an insurer, a risk-free discount rate is appropriate—because the obligation becomes immediate and must be backed by secure, guaranteed assets.

Applying a risk-free rate universally, as some critics argue, may be theoretically appealing but practically misleading. It assumes an immediate wind-up scenario, which is not the case for ongoing pension plans. These plans have taxing authorities behind them, long investment horizons, and stable benefit payout patterns.

So while it's true that using higher expected returns lowers reported liabilities, it's not necessarily a perverse incentive—it’s a reflection of the economic reality under which these plans are designed to operate.

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