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Basics of Pension Funding

# Quick Recap: Unfunded Liabilities

Okay, let’s put all of this together. Remember the key ideas about normal cost:

• Benefit Formula: Your benefits are determined using a formula based on how long you work, a multiplier, and your final average salary.
• Benefit Estimate: Actuaries make estimates about how long you and other teachers will work, when you’ll retire, and what your salary will be. Based on all of these assumptions, actuaries can measure the value of pension benefits that you earn each year.
• Funding Formula: Actuaries then figure out how much should be contributed into the pension fund that will be enough to pay for those benefits, once the contributed dollars are invested. This is the formula where Benefits plus Expenses should be equal to Contributions plus Investments (or B + E = C + I).

• Funding Shortfall: When contributions or investments are not enough to equal B + E, that means there is a shortfall in the assets of the pension fund, known as unfunded liabilities.
• Amortization Payments: Actuaries calculate a payment plan for the government employer to backfill that shortfall in pension assets and pay down the unfunded liability.

Example

The amount of money to be paid each year, known as an amortization payment, gets added to normal cost. The total is the actuarially determined contribution. In the Georgia example, normal cost was 13.25% of salary. As of 2018, the unfunded liability amortization payment is 13.95% of salary:

• The member contribution is 6% of their salary.
• The employer contribution is
• 7.25% of salary to cover a portion of the of normal cost +
• 13.95% of salary to cover the unfunded liability payments =
• 21.2% of salary total employer contribution.

Going forward, if all of these contributions are made and future actuarial assumptions are correct, then eventually the pension fund will become 100% funded and there will be no unfunded liabilities.

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