Actuarial Basis Of Accounting

Back in the day, employees would contribute, along with their employer, to a pension fund. A few companies still do this, along with the government, funding things like teacher retirements. Say you are lucky enough to work for a company with a pension. When you retire, the company pays you a monthly payment, like a salary, but smaller.

Firms have to pay someone to calculate how much to pay each month into the pension fund, so they don't run out of money. We would all feel terrible if our grandpas couldn't head to Mexico on holiday each winter.

Actuarial basis of accounting is the method used to calculate the monthly firm payment. Here's the gist: the total contributions made to the fund + the investment returns = payments to be made to the retirees. In other words, it is simple bill paying: money going out must equal money coming in. But these actuarial tricksters must work into their calcs how many years employees will work, what their wage increases will be over their working years, and the rate of return on the pensions investments. In other words, they'd better have a great fund manager. But a good question is: Who got paid to calculate the Social Security fund all those years?