How the Discount Rate Impacts Future Generations

Writing in Vox, Kelsey Piper explains an obscure policy tool, set by the federal Office of Management and Budget (OMB), whose impacts can reverberate across generations. “The discount rate basically tells us how to value the future versus the present — and thus has tremendous implications for the policies we enact today,” Piper writes.

High discount rates mean that we, as a society, are willing to trade off the future for the present: that we’ll generally prefer policies that benefit us now over policies with long-term benefits that won’t be realized immediately. Low discount rates mean that we, as a society, are willing to make investments that won’t be realized for a long time.

By proposing to lower the discount rate from 3 percent to 1.7 percent recently, the OMB is essentially putting more value on future returns. According to Piper, this small change could have a major impact on how money is spent. Piper uses carbon as an example. “Just a small shift to a lower discount rate significantly changes what trade-offs we are willing to make — because with a lower discount rate, we care more about the effects of carbon on the world our grandchildren live in.”

See the source article for a detailed explanation of how the discount rate works and other new information in the OMB’s recent analysis.