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A Small Number with Surprisingly Large Consequences: why the government choice of discount rate should interest everyone

How much will the pension promises which we are making today cost us in the future? In this fascinating new analysis, Angus Hanton argues that the government has been guilty of systematically undervaluing the cost of its pension liabilities towards public sector workers in order to avoid having to make difficult political decisions about how much we can really afford to promise them.

In order to work out the cost in today’s money of a financial liability which will have to be paid in the future, economists use a device called a “discount rate” to express it in terms of “net present value.” The higher the rate which is chosen, the smaller the cost of the liabilities appears to be in the present. When it comes to massive liabilities – such as paying the unfunded pensions of today’s public sector workers – it is clearly in the government’s interests to make these liabilities appear to be as small as possible by choosing a higher discount rate. The losers from this deception will be future generations of taxpayers, who are being handed an enormous bill without being given any say in the matter.

The sums involved are vast: the current liabilities to provide pensions for teachers, civil servants, NHS workers and the armed forces are already officially worth £800 billion and growing, and would be much bigger if a lower discount rate were being used. This paper calls attention to the way we are robbing our children by passing on these unfunded burdens, and it deserves to be read by anyone who cares about promoting justice for future generations.