A discount rate shrinks future benefits and costs by a percentage for each year they lie ahead. At 4 percent a year, a benefit 18 years from now counts for about half as much as the same benefit today. The choice of rate can decide whether a long-term program looks brilliant or pointless, so it is worth asking what the rate stands for.
Three reasons to discount
Uncertainty. A benefit promised for the future may never arrive. The program may fail, or the world may change in ways that make it irrelevant. In the extreme, a risk that humanity does not survive acts like a discount rate on all expected future wellbeing.
Growth. If people in the future are richer, an extra dollar does less for them than it does for someone poor today. Economists combine this with a time discount rate in what is called the Ramsey rule, after the philosopher and mathematician Frank Ramsey.
Pure time preference. Valuing later wellbeing less only because it comes later. Ramsey himself rejected it. In 1928 he wrote that discounting later well-being is “ethically indefensible and arises merely from the weakness of the imagination.”
The first two reasons are about facts: what will happen and how much it will help. The third is a moral claim about whether time itself makes a life count less.
An example
A 2023 review by Rethink Priorities described GiveWell’s then-current 4 percent rate for future income and consumption gains, with a lower rate for health benefits. It broke the 4 percent into parts: 0 percent for pure time preference, 1.4 percent for temporal uncertainty, 1.7 percent for improving circumstances as people get richer, and 0.9 percent for benefits that compound over time. Every part except the first is a claim about the world that evidence can improve.
Why it is contested
The rate can settle large questions on its own. William Nordhaus argued in 2006 that the Stern Review’s call for urgent, deep cuts in greenhouse gas emissions depended decisively on its use of a near-zero social discount rate, and would not survive rates consistent with market interest rates. Disagreements like this mix facts, such as how fast economies will grow, with values, such as whether time itself matters. Separating the two is the first step to settling them.
In Charitology’s terms, the Future generations framework treats the claims of people not yet born as central. The Short Horizon condition is the hypothesis that the charity system’s timescale, set by annual budgets and reports, is shorter than the timescale of its problems. How much the future should count is Open Problem 13.