The "GATT Rate," or General Agreement on Tariffs and Trade rate, refers to a set of interest rates used in the United States to calculate the lump sum payout of a pension benefit. These rates are based on the interest rates of long-term U.S. Treasury bonds. The GATT rate is used to determine the present value of future pension benefits, helping to ensure that the lump sum payout is equivalent in value to the series of future payments that a retiree would otherwise receive.
When a retiree chooses to take their pension benefit as a lump sum rather than as an annuity, the GATT rate is used to discount the future stream of payments to a present value. A higher GATT rate will result in a lower present value, and consequently a smaller lump sum payout, because the future payments are discounted more heavily. Conversely, a lower GATT rate will result in a higher present value and a larger lump sum payout.
The use of the GATT rate for this purpose was established under the Pension Protection Act of 2006, which updated previous legislation governing the calculation of lump sum pension payouts.Before the GATT rate was used, the interest rates used for these calculations were often set by the pension plan itself, which led to inconsistencies and the potential for underfunding of pension obligations.
Employers and plan administrators use the GATT rate, among other factors, to determine the lump sum value of pension benefits for employees who are eligible for a pension and who elect to receive their benefits in a lump sum. It's important for retirees to understand how the GATT rate affects their pension lump sum so they can make informed decisions about their retirement benefits.
*Please note* that the exact procedures and interest rates used can vary depending on the specifics of the pension plan and the regulations in effect at the time of the calculation
Here's why GATT rates are significant and how to make sense of them:
Tariff Reduction: GATT aimed to reduce tariff rates on imports of goods. Tariffs are taxes or duties imposed on imports, which can increase the cost of imported products. By negotiating lower tariff rates, GATT sought to make it easier for countries to trade with each other.
Trade Liberalization: GATT rates are significant because they contributed to trade liberalization. Lower tariffs make imported goods more affordable, stimulate international trade, and promote economic growth.
Nondiscrimination: GATT introduced the Most-Favored-Nation (MFN) principle, which means that if one member country grants another member country a certain trade advantage or concession, it must do the same for all other member countries. This principle promotes fairness and non-discrimination in international trade.
Predictability: GATT rates provided a degree of predictability for businesses engaged in international trade. Knowing the tariff rates that would be applied to their products allowed companies to plan and budget effectively.
Rules-Based System: GATT established a rules-based system for international trade. Member countries agreed to abide by a set of rules and procedures, creating a more stable and transparent trading environment.