One summary measure that is frequently used as an indicator of whether or not a proposal achieves solvency is the 75-year actuarial balance. When the actuarial balance is zero or positive, financing for the program is considered to be adequate for the 75-year period as a whole. Therefore, the first goal is to have the improvement in the actuarial balance under the proposal equal or exceed the actuarial deficit under current law. One might attempt to meet this goal by adding together the changes in actuarial balance indicated for each provision included in a proposal. However, due to the interaction among various provisions, the sum of the changes in the actuarial balance often exceeds the change in the actuarial balance for the proposal as a whole because the change in the actuarial balance for each provision is measured individually against current law. When several provisions that improve the actuarial balance are combined, the measured incremental effect of any single provision is often smaller than the effect of that provision measured individually against current law.For example, consider the following two provisions. We will assume that each increase described in the two provisions applies to those newly eligible for retired worker benefits with the same effective date.
- Provision 1: Increase the early retirement age (EEA) an additional
three years; the EEA would increase to age 65. Specifically, all
program parameters that are linked to the EEA would also increase.
This would include expanding the benefit computation period (the number
of years used to calculate benefits) as the EEA increases.
- Provision 2: Increase the number of years used to calculate benefits for retirees from 35 to 38.
If each of these two provisions were measured against current law, the sum of the individual financial effects would be different than the overall effect when the provisions are combined together. Under provision 1, the number of years used to calculate benefits increases from 35 to 38 because the number of calculation years increases by one year when the EEA increases one year. But under provision 2 alone, the number of years would also increase to 38. Thus, in this case, inclusion of provision 2 adds no additional savings to the amount estimated for provision 1 alone.
It should be noted that further analysis is required in order to determine whether a proposal is expected to achieve solvency throughout the 75-year period or to achieve sustainable solvency. In order to achieve 75-year solvency, the projected assets in the trust funds must be positive throughout the 75-year period. In order to achieve sustainable solvency, the proposal must achieve solvency throughout the 75-year period, and the projected trust fund assets must be stable or rising as a percentage of annual program cost at the end of the period.