Amortization Period

In Detail

When a pension plan has an unfunded liability, the sponsor must make additional contributions beyond the normal cost of benefits being earned that year. The amortization period determines how quickly this debt is paid off — shorter periods mean larger annual payments but faster debt reduction, while longer periods reduce annual costs but extend the period of underfunding. Most actuarial standards recommend amortization periods of 15-30 years. Some plans have used periods as long as 30 years with "rolling" resets, meaning the clock restarts each year and the unfunded liability is never actually paid off — similar to making only minimum payments on a credit card.

This practice, known as negative amortization, has been criticized by financial experts because it allows pension debt to grow over time. GASB now requires disclosure of whether a plan is using a closed (fixed end date) or open (rolling) amortization period. Plans using closed periods of 20 years or less are generally on a credible path to full funding, while plans with open 30-year amortization schedules may be deferring costs to future taxpayers or shareholders indefinitely.