 FREQUENTLY
ASKED QUESTIONS ABOUT ACTUARIAL ISSUES |
 |
| What
are the basic assumptions used in an actuarial valuation? |
|
| |
| There
are two types of assumptions used in an actuarial valuation.
Economic assumptions usually have a greater impact on
the values determined in the valuation. Two key economic
assumptions are investment return (used to determine
present values) and salary increases (used to project
current pay until retirement). Demographic assumptions
deal with the likelihood of retirement, death, disability,
or termination of employment at each age. |
| |
| What
is actuarial funding? |
|
| |
| Actuarial
funding determines an annual cost to fund both the current
benefits (Normal Cost) and Past Service liability (Unfunded
Actuarial Accrued Liability). Under a funding schedule,
a series of payments is determined to amortize the Unfunded
Actuarial Accrued Liability over a period of years,
as well as pay the annual Normal Cost. |
| |
| What
is the difference between amortizing the Unfunded Actuarial
Accrued Liability on a level dollar or increasing percentage
basis? |
|
| |
| Under
the level dollar approach, payments remain level each
year for the period specified in the funding schedule
(much like a mortgage). Under an increasing percent
schedule, payments increase by a set percentage (4.5%
is the maximum allowed) each year over the life of the
schedule. Under an increasing percentage schedule, however,
the payment in the early years of the schedule is not
large enough to even pay the interest on the outstanding
principal. Thus, level dollar is the approach required
of private sector plans under federal law. |
| |
| What
is the difference between pay-as-you-go system and actuarial
funding? |
|
| |
|
| Under
a pay as you go system, appropriations are made each
year to equal the amount of benefits expected to be
paid out to retirees. There is no provision for advance
funding for benefits to be paid in the future. One of
the main principles of advance or actuarial funding
is the premise that the cost of retirement benefits
for current employees should be paid during the years
of service of that employee - the period for which the
taxpayers are receiving the benefits of the services
of the employee. |
 |
| |
