State of Pensions 2024

What is the State of Pensions in 2024?

State retirement systems in America are still Fragile.

This an annual report on the financial status of state and local public pension systems, put into a historic context. State and local governments face a wide range of challenges in general – and some of the largest are growing and unpredictable pension costs. The scale and effects of these challenges are best understood by considering the multi-decade financial trends and funding policy decisions that have brought public sector retirement systems to this moment.

State and local governments paid a record amount into their public retirement systems last year — 31.3% of payroll on average, or $180.7 billion. In one way this reflects a positive trend, as more money needs to get contributed to public plans since pension debt won’t be eliminated through investment returns on their own. However, it is a problem that nearly two decades on from the Global Financial Crisis this level of money has not been enough: America’s pension plans still have $1.34 trillion in unfunded liabilities as of 2024, with a funded ratio of 80.2%.

Looking forward, the long-term outlook for pension funds in 2024 and beyond will likely be shaped by rising contribution rates stemming from pension debt paralysis, increasing exposure to valuation risk, and ongoing financial market volatility.

So what are the trends in public pension funding in 2024?

• State and local plans are reporting an investment return average of 10.3%. Public equity and fixed income performance have been strong, helping plans to beat their 6.9% average assumed rate of return—which is the main target to hit each year in order to prevent further growth of unfunded liabilities.
• Funded status in 2024 has shown moderate improvement, increasing to 80.2%, up from 75.5% in 2023. We estimate unfunded liabilities will decline to $1.34 trillion, down from $1.64 trillion in 2023. This is a welcome improvement, but it will require additional years of similar performance to break public plans out of their pension debt paralysis.

Examining Pension Debt: Causes of Unfunded Liabilities

Today’s pension debt is not primarily caused by increased lifespans, enhanced benefits, or states failing to pay 100% of required contributions. The three primary factors explain unfunded liabilities as of 2022: changes to actuarial assumptions, underperforming investment returns, and interest on the debt.

Managing pension plans requires a wide range of assumptions about future events: investment returns, mortality rates, workforce turnover, salary growth, inflation, government contributions, and more. There are lots of places where actual experience may not line up with actuarial expectations — leading to unfunded liabilities or improved funding.

Pension funds compare actuarial and assumed experience every year, along with other factors that can change the value of liabilities.

We can use the data to look at the internal structure of public pension plans and measure exactly which categories are causing the country’s collective unfunded liabilities.

The red column in the chart below shows the total unfunded liabilities from 2002-2022. Each bar to its right shows much individual factors and assumptions contributed to the accumulation of these unfunded liabilities.

The largest contributor to the $1.2 trillion in unfunded liabilities as of 2022 was necessary improvements to actuarial assumptions (37% of the total accumulated growth). The next largest factors were underperforming investment returns (28%) and interest growing faster than contributions paid (26%).

The below chart looks at how these factors have contributed to the growth of pension debt overtime.

Underperforming investment experience was the largest contributor to unfunded liabilities, until historically strong 2021 investment returns.

Interest on pension debt has been steadily increasing as a cause of unfunded liabilities for nearly two decades.

Benefit experience has gone from causing unfunded liabilities to reducing pension debt.

Trend to Watch: Valuation Risk

There is a sharply increasing share of pension fund investments with values based on valuation-methods instead of market prices, which means an increasing share of pension portfolios are exposed to the risk of being overpriced.

What is Valuation Risk?

“Valuation Risk” is the risk to pension funds that the value of their assets as reported to them is inaccurate (e.g., understating or overstating the actual value) because the asset pricing method used is based on valuation models, as opposed to market-based prices.

If asset values are overstated today, then that means reported funding levels are overstated. This in turn can lead to lower than appropriate contribution rates, which will mean larger unfunded liabilities in the future than if assets were more accurately priced.

Overstated pension asset values can also lead to other policy decisions that could influence future funded status — such as raising the value of benefits or having lower political priority for supplemental funding to pay down unfunded liabilities faster than planned.

This is in contrast to “opportunity risk” (the risk that a specific use of capital doesn’t justify the risk-adjusted returns relative to other opportunities), or “asset risk” (the risk of losing money on an investment), or “management risk” (the risk that trustees will inefficiently allocate capital).

The share of pension fund assets priced based on valuations has grown to 27.9% of assets as of 2023, up from an average of 9% between 2001–2007. This means the share of pension fund assets exposed to “valuation risk” has roughly tripled since the Global Financial Crisis.

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Trend to Watch: The State of Inflation Protection

One of the downstream effects of pension debt paralysis is a lack of inflation protection of worker’s retirement benefits. As pension debt has accrued and stagnated, many states have changed their policies to reduce or eliminate COLAs in search of cost savings. This has resulted in COLA values that are less than the rate of inflation, and by extension, the erosion of the spending power of retirees retirement checks.

The map below shows the range of COLA policies by state, as of 2024:

The average national rate of inflation (CPI) over the past two years was 9.1% in 2022 and 3.0% in 2023. The average actual COLAs paid in 2022 and 2023 nationally were 1.83% and 2.02%, respectively.

The chart below shows the average COLA by policy design for 2023:

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National Trends

Unfunded liabilities for state and local pension plans have remained paralyzed above $1 trillion since the 2008 Financial Crisis.

The improvement in aggregate funded ratio in from 2023 to 2024 was the second best year over year increase in the last decade.

The 10-year average investment return has fallen to meet the assumed rate of return, indicating a tempered outlook for long-term investment gains.

Government employer contributions have surpassed 30% of payroll for the third year in a row.

Employer contributions have steadily increased over the past two decades, mostly because of increased unfunded liability amortization payments.

Normal cost payments, in dollars, are up 139% between 2001 and 2023. However, unfunded liability payments have risen 2,450% during the same period.

State and local employee contributions to their own retirement plans have continued to steadily increase.

Public pension asset allocations have continued to shift away from transparent public equities and relatively safe fixed income investments into riskier categories as trustees search for stronger investment returns.

Negative net cash flows from contributions and benefit payments have steadily increased over the past two decades, reflecting more “mature” pension plans.

Looking to the Future

Looking forward, there are three primary indicators to watch.

1. Pension debt paralysis has caused average employer contributions to increase from 3% to 31.3% of payroll between 2008 and 2024, all while:
   • Unfunded liabilities have risen to levels persistently above $1 trillion.
   • Funded ratios have not rebounded to pre-Global Financial Crisis levels.
   • The higher contributions paid are not even enough to prevent interest from continuing to accrue on unfunded liabilities — which is the fastest growing contributor to pension debt for the country as a whole.
2. Meanwhile, there is a less than a 50% chance, on average, that a U.S. public pension plan can earn a 6.9% return over the next 10 years, which is the average rate of return those plans are expecting to earn.
3. In addition, necessary changes to actuarial assumptions and expected demographic turnover patterns are likely to continue to put downward pressure on public pension plan funded ratios.

This collectively suggests that contribution rates will continue growing in the coming years without meaningfully reducing unfunded liabilities—unless state leaders appropriately respond with improved accounting and adequate near-term contribution increases that will gradually decline over time.

State of Pensions 2024

Download the full State of Pensions 2024 report and fact sheets to dive deeper into the trends affecting public pensions.