What is an Actuarial Balance?

by Investing School on June 4, 2012

The term actuarial balance relates to solvency of the Social Security System. It measures the difference between anticipated Social Security obligations in the future and the actual rate of income at present. If those two numbers are in line with one another then one would consider the Trust fund to be in ‘actuarial balance.’ Anticipating such times should help the government prepare in advance to meet the shortfall.

The balance is routinely calculated for 66 different valuation periods. The first such period measures the next 10 year period, and then projects out for the following 65 years to reach the full 75 year projection period. Any time that the anticipated draw on Social Security exceeds the future income, the fund would be considered out of balance. In theory that difference would result from FICA not covering anticipated withdrawals at a given time.

With the Social Security Fund in danger of insolvency many government pundits have put forward ideas that are supposed to bring the fund back to liquidity. Unfortunately, a straightforward idea, such as simply raising payroll taxes, won’t actually solve the problem. The anticipate withdrawal rate of the upcoming Baby Boomer generation is going to be difficult to keep up with.

True solvency for Social Security involves stability of the Fund’s capital resources over time. This will require asset stability rather than simple actuarial balance. The concept that actuarial balance will solve the problem has led to a pattern whereby Congress routinely raises payroll taxes without actually resolving the issue.

Actuarial balance is also applied to other funds such as Medicare.

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