The Widening Gap
The Great Recession's Impact on State Pension and Retiree Health Care Costs
States use various investment rate of return assumptions, the most common of which is 8 percent, to discount the value of their future liabilities. In other words, they calculate the amount that, were investments to generate 8 percent returns each year, would be equal to the eventual cost when the bill comes due. Some states use different rates for each of the different plans they participate in. For retiree health care, states use a lower discount rate, as they typically do not have substantial assets generating returns to pay for those benefits.
Pew re-estimated pension liabilities by assuming they will come due in even increments over the next 50 years. Based on that assumption, Pew calculated an undiscounted liability and applied the new discount rate to that stream of payments. Because most states do not use an assumed rate of return to estimate their retiree health care liabilities, we did not do the same for those obligations.a