An actuarial reduction is calculated using standard industry practices. It reflects the fact that you are starting to receive a pension earlier, and will collect it for longer, than if it were paid starting from your normal retirement age (60 or 65).
Here’s an example of how a reduction would apply if the changes are approved:
Martha is 54 years old on the effective date of the change (let’s assume January 1, 2021 for this example). She wants to retire at age 55 (NRA 65) and so she works an extra year after the effective date and retires on January 1, 2022. The pension Martha earned during the first 29 of her 30 years would remain unreduced – these benefits are for service before the effective date.
This unreduced portion represents 96.7% of her total pension (29 out of 30 years). Which means that the actuarial reduction is applied to only 3.3% of her total pension (1 out of 30 years).
Applying the reduction
The actuarial reduction varies by age but is approximately 5% per year for each year she retires before age 65. Roughly calculated, Martha would receive a 50% reduction (5% x 10 years) applied to the portion of her pension (one year) she worked after the effective date, so 50% of the 3.3% of her total pension. The rest of her pension remains fully unreduced.
In total, Martha’s annual lifetime pension is reduced by about 1.7%.