Actuarial Assumption
The financial and demographic projections used to calculate pension costs and liabilities — including expected investment returns, employee life expectancy, and salary growth.
How It Works
Key actuarial assumptions include the discount rate (used to calculate the present value of future benefits), assumed investment return (typically 6.5-7.5%), mortality tables (how long retirees will live), salary growth rates, and employee turnover/retirement patterns. Overly optimistic assumptions make a pension plan appear healthier than it actually is. Many pension experts argue that public plans have historically used assumptions that are too optimistic, understating the true size of unfunded liabilities.
Related Terms
- Funded Ratio — The percentage of a pension plan's projected liabilities that are covered by current assets. A plan with $80 in assets for every $100 in liabilities has an 80% funded ratio.
- Unfunded Liability — The difference between a pension plan's projected liabilities (what it owes to current and future retirees) and its current assets. Also called the unfunded actuarial accrued liability (UAAL).
- Discount Rate (Pension) — The interest rate used to calculate the present value of future pension liabilities. A lower discount rate produces higher liabilities; a higher rate produces lower liabilities.
About This Definition
This definition is part of the CitySpend Municipal Finance Glossary — 59 terms explaining how city governments fund and manage public services. All definitions are written in plain language for taxpayers, journalists, students, and municipal bond investors.