State and local government numbers suggest public pension plans are underfunded by about $1 trillion. The Government Accounting Standards Board is changing the guidelines for how state and local governments report their finances, which is going to make the pension gap look even bigger. For now, cities and states have assumed a discount rate of 8%—the rate their investment earns each year. Because it’s risky to assume the good returns of the past will continue in the future, the GASB is dropping the discount rate to 5%. The lower the rate, the more you have to save to pay the same pension in 30 years. The GASB and Joshua Rauh, a professor of finance at the Stanford University Graduate School of Business say changing the number doesn’t change economic reality—it just better reflects what that economic reality is.
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