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 2023: 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 2000-2023. Each bar to its right shows much individual factors and assumptions contributed to the accumulation of these unfunded liabilities.

The largest contributor to the $1.33 trillion in unfunded liabilities as of 2023 was necessary improvements to actuarial assumptions: $473.8 billion accumulated since 2000 (35.7% of the total accumulated growth). The next largest factors were underperforming investment returns (29.0% of the total) and interest growing faster than contributions paid (22.4%).

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.

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

In 2025, The national shortfall in assets for state and local pension plans shrank from $1.51 trillion in 2024 to an estimated $1.35 trillion shortfall in 2025.

This is nearly the same national unfunded liability level as in 2009 ($1.37 trillion).

The national aggregate funded ratio has improved for the third year in a row. 

The aggregate funded ratio for statewide and municipal pension plans in 2024 (81.4%) is still below the recent high mark in 2021 (83.9%).

Progress in the reduction of assumed rates of return to levels with higher levels of probability has stalled since the Covid Pandemic.

On the upside, the 10-year rolling average  (2016-2025) at 7.44% is slightly above the 6.87% average assumed return. On the downside, since 2021’s asset bubble returns, the average return for plans (2022-25) is just 4.04% with significant volatility and market unpredictability forecast for the coming years.

We estimate the average investment return for 2025 will be 5.41% (based on data through June 30).

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

Combined state and local employer contributions in 2001 were 9.41% of payroll. During the fiscal year ending 2025, employer contributions are 31.65% of payroll.

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

Between 2001 and 2024 the dollar payments toward normal cost more than doubled (up 159%), and for unfunded liability payments jumped over 2,541%.

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

Note: Public employees are not uniformly covered by Social Security. Some states never opted into Social Security and, therefore, typically have higher valued benefits and relatively higher contribution rates than for statewide systems where members also have access to Social Security benefits.

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.

“Alternatives” are a third of pension fund investments (31.7%), driven by  private capital investments (13.4%).

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

Larger negative cash flows put increased pressure on investment return income each year to make up the difference.

There are three key areas to focus on, as America’s state and local pension plans look to the future:

1. Will Contribution Rates Keep Growing? Employer contributions successfully offset poor investment performance this year and projections show contribution rates continuing to increase. However, economic instability from unpredictable policy changes, potential production declines from trade disputes, and state budget strain from federal cost-shifting could force states to slow or halt these necessary contribution increases.
2. Will Assumed Returns Stay Flat? Capital market assumptions published in the summer of 2025 are slightly improved compared to 2024, with generally consistent caveats about geopolitical risks. Combined with higher treasury yields and volatile tax revenues, public pension plans are unlikely to reduce their assumed rates of return in the near term, keeping expectations at current levels despite market uncertainties.
3. Will Interest on the Debt Continue Its Decline? There has been a two-year decline in the amount of unfunded liabilities caused by interest on the debt. This trend is a direct byproduct of rising contribution rates and relatively lower investment return assumptions. If contributions do keep rising that could help with reducing how much this factor is contributing to unfunded liabilities.

Multi-year, small, steady improvements have pushed the national average funded ratio above 80% and kept unfunded liabilities consistently between $1 trillion and $1.5 trillion. The upside of this is that things aren’t getting worse and there is reason for cautious optimism a positive trajectory could persist. The downside is that plans have just survived, not thrived. The costs of pension debt paralysis continue to grow while the fragile system remains vulnerable to market downturns and unpredictable political policy.