State of Pensions 2026

State of Pensions is Equable Institute’s annual report on the status of statewide public pension systems, put into a historic context.

Governments face a wide range of challenges in general — and one of the largest is growing, and often unpredictable, pension costs.

State of Pensions analyzes trends in public pension funding, investments, contributions, cash flows, and benefits for 253 of the largest statewide and municipal retirement systems in all 50 states to illuminate the scale and effects of these challenges.

National Trends

The following key facts provide insight into what’s driving improvements in funded status as well the structural risks pension plans face going forward.

• Funded Status: The 85.0% projected national average is up from 81.2% in 2025; 41.5% of plans are now within Resilient funded status.
• Unfunded Liabilities: The $1.13 trillion total shortfall is only down $210 billion versus 2009 in absolute dollars. 
• Contributions: 31.83% of payroll is a new historic high employer contribution rate; pension debt repayments are 70.4% of employer costs.
• Investment Returns: The 9.37% average return projected for 2026 beat the 6.8% target for the fourth straight year; the 10-year rolling average is now 8.69%. 
• Valuation Risk: 27.1% of public pension assets are valuation-priced versus market-priced, which is up compared to a five-year rolling average.
• A.I. Investment Dependence: Pension funds have at least 8% to 10% of assets invested in A.I.-related companies; the actual number is certainly higher after factoring in private equity and money with external asset managers.

For all the details, download the full report: State of Pensions 2026

What is the State of Pensions in 2026?

State and local retirement systems in the United States have improved across several key metrics over the past year. However, the state of pensions overall remains Fragile in 2026, which we define as consistently between 60% and 90% funded.

However, there is more variation on the state level, as shown in the interactive map below. Roughly 31% of plans are within Resilient funded status, while almost 10% of plans are Distressed.

Forty-five states improved their funded status from 2025 to 2026, and seven states now have at least a 100% average funded ratio.

Two states remain in a Distressed status with funding levels less than 60%: New Jersey (56.7%) and Illinois (56.4%).

Two other states, Kentucky (63.1%) and Mississippi (60.6%), improved in 2026 but have struggled with their funded status right around the Distressed line.

While most states remained in the same funded ratio tier from 2025 to 2026, a handful of states crossed tier boundaries.

States that improved into the 90% to 100% range include Florida (91.8%), Georgia (93.5%), Minnesota (91.5%) and Oklahoma (94.8%). No states moved into a lower tier.

How States Have Navigated Post-Pandemic Volatility

Some states have navigated the financial market volatility of the post-pandemic years better than others.

While state pension funds have increasingly similar annual returns (for a deeper dive on this topic, see Page 25 of the full report), some have consistently produced the best investment returns. States have also varied on how much in supplemental dollars they’ve put into their pension funds.

The interactive chart above shows the average annual return on assets since 2020 for each state, which includes both contributions and returns.

Between 2020 and 2026, the states with the most improved assets include: Connecticut, Arizona, South Carolina, Washington, Indiana, and Michigan. 

States Falling Behind

These states have all performed more than two times better than: West Virginia, Ohio, North Carolina, Colorado, and Alaska.

While most states improved substantially during one of the strongest sustained return periods in modern pension history, seven states averaged less than five percentage points of growth per year in assets between 2020 and 2026.

Some of these were already well funded (Wisconsin, Utah, and South Dakota), but four states had slow-growing assets and remained below 90% funded in fiscal year 2026: Ohio, North Carolina, Colorado, and Alaska.

These data suggest a structural problem, not a timing issue.

Pension Debt Relative to State Economies

The relationship between a state’s funded ratio and its pension debt as a share of its economy reveals four distinct fiscal positions:

• Low Debt/Well Funded: The pension shortfall is a manageable share of state gross domestic product (GDP). These states have structural resilience. The risk here is complacency, as confidence erodes discipline on assumptions or funding policy.
• Low Debt/Poorly Funded: A pension shortfall exists, but the state has capacity to address it. The path to recovery is sustained political will on contributions, plus modest assumption improvements — a few disciplined years can move these states to the top-left quadrant.
• High Debt/Well Funded: No state currently holds this position. Generally, high debt and strong funding don’t coexist.
• High Debt/Poorly Funded: The combination of high pension debt-to-GDP with low funding means liabilities compound faster than assets recover. The path to recovery requires major measures, such as legislative change, large supplemental contributions, or benefit modification.

Most states (28) are well funded with manageable debt, while 17 states have underfunded plans but economies large enough to address the problem with sustained policy effort.

Six states face the worst combination: below 80% funded and pension debt exceeding 10% of GDP. These states — Illinois, Kentucky, New Jersey, Mississippi, Hawaii, and New Mexico — face structural fiscal pressure that market returns alone cannot resolve.

Two states, Alaska and Connecticut, have also struggled with their pension debt relative to the size of their state economies. While not in the most distressed quadrant, they are near the borderline.

Factors Driving Improvements in Funded Status

Two primary factors are driving the improvements in funded status:

1. Historically high contribution rates
2. Strong investment returns

1. Contribution Rates Outpacing Interest Payments

Employers now contribute 31.83 cents of every payroll dollar to pension funds. This is a historic high and more than triple the 9.4% rate in 2001. 

However, only 9.42 cents of that goes toward funding new benefits (the “normal cost”). The remaining 22.42 cents goes toward paying down the accumulated unfunded liability. Since 2001, unfunded liability cost accounts for 95% of the increase in total cost.

Between 2001 and 2025, the dollar payments toward normal cost more than doubled (up 174%) and for unfunded liability payments jumped over 2,643%. Adjusted for inflation during the same period, normal cost grew 51%, while unfunded liability payments rose 1,414%.

Trend analysis suggests that contribution rates have increased enough that interest on the debt is declining as a share of unfunded liabilities.

This is a positive sign for future unfunded liability levels because it suggests that today’s high contribution rates are preventing unfunded liabilities from being even worse and might start to help drive down the total.

2. Investment Returns Remain Strong

Through June 30, 2026, the average public plan return is 9.37%. This marks the fourth consecutive year that actual returns have exceeded the average 6.8% assumed rate of return.

When funds miss their target, the shortfall compounds through interest on the unfunded liability. When returns exceed assumptions, it allows for a reduction in existing unfunded liabilities.

Since single point-in-time measurements can be misleading, it is important to look beyond just one-year returns.

Fortunately, the current 10-year rolling average of 8.69% (light blue line in the interactive chart above) is also above the current assumed rate of return (dark blue line).

Structural Risks Facing Public Pensions

While pensions have earned strong returns in recent years by making investments in growth-oriented market segments, they now face significant risks stemming from the concentration of A.I.-related investment portfolios alongside a buildup of valuation risk.

A.I. Concentration in Public Pension Portfolios

Increasingly, public plans are vulnerable to a broad market downturn as their assets have collectively converged on an investment strategy focused on A.I. and related themes that primarily seeks growth with little allocated to countercyclical strategies.

Public pension funds are regular investors in the largest companies as well as specific technology companies. 

We reviewed the most recent SEC filings for the top 25 public pension funds to identify A.I.-related companies in which they invest.

For the 23 public pension funds that disclosed all or a portion of their investments, we found they have invested at least 8.6% of their assets in a basket of 50 A.I.-related companies. 

The actual direct exposure to A.I.-related investments is higher than this, though:

• Several public pension funds use external asset managers for trading public equities; these external managers do not disclose their specific stock holdings for specific pension funds. 
• None of the top 25 public pension funds reported their private equity or private debt investments in specific A.I.-companies. 

Based on our review of nonpublic data for privately held companies, plus the scale of public equity investments that are not disclosed, we estimate the amount of public plan assets directly exposed to A.I. businesses could be 10% or more. 

An 8% to 10% direct exposure to a select basket of A.I.-related companies is between $513 billion and $642 billion in pension assets, based on estimated 2026 figures. 

These plans are balancing a highly lucrative “A.I. powers the world” growth scenario against the systemic risk of an A.I. asset bubble.

Increasing Valuation Risk of Pension Fund Assets

“Valuation risk” is the risk that the value of pension fund 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.

This is important because:

• 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.

Fund managers generally price alternative investments, like private equity and real estate, based on valuations rather than market prices.

As the interactive chart above shows, the share of pension fund assets priced based on valuations grew to 27.1% of assets as of 2025, up from an average of 9.0% between 2001–2007. This means the share of pension fund assets exposed to “valuation risk” has tripled since the Global Financial Crisis.

For a deeper dive on this topic, see the special section starting on Page 36 of the full report.

Alternative Investment Allocations by State

The interactive map below shows that the level of exposure to alternative assets varies significantly from state to state.

Most states have between 20% and 40% of their collective pension fund investments allocated to alternative asset classes. However, a few outliers are more aggressive — some have over 50% of their pension fund money in alternatives — and a handful are more conservative.

The interactive infographic above shows states based on their assets under management (AUM) and the percentage of those assets invested in private capital, real estate, hedge funds, and miscellaneous alternatives.

Five states (California, New York, Texas, Ohio and Illinois) manage half of all public pension assets in the United States. So, the dollar allocations to alternative investments in these states are a major driver of national figures.

However, the size of state pension fund assets is not related to their alternative investments. For example, some smaller states have over 50% of pension assets invested in alternatives.

Some pension funds have committed a particularly large share of their assets to alternative investments. The list above shows the 20 state and local pension funds (or investment commissions, if assets of multiple retirement plans are commingled) that have the largest share of assets in alternatives.

The significant lack of transparency in how pension funds invest in valuation-priced asset classes, including alternatives like private equity and real estate, exacerbates concerns about valuation risk.

What to Watch in 2027

There are three key risk signals to monitor in the coming year.

• Contribution Pressures: State leaders have remained committed to pension funding even with budget pressures, though several states have eliminated supplemental payments. We’ll monitor whether geopolitical costs (war, tariffs, supply chain) pressure state budgets toward contribution rate reductions. 
• Allocation Changes: Public plans are currently locked in a consensus approach to high-risk growth strategies and are heavily dependent on the success of A.I. companies ensuring there is no financial market collapse. We’ll see whether any pension funds attempt to shift toward countercyclical positions.
• Assumption Stagnation Risk: The pace of ARR reduction has nearly stopped since 2020. The current average of 6.8% still has a less-than-even chance of being met. We’ll track the number of plans scheduled to revisit their ARR assumptions in 2026.

The Bottom Line

Public pension funds have enjoyed four consecutive years of above-target investment returns, leading to their best funded status since the bottom of markets during the Global Financial Crisis. Most states are paying their full required contributions, and amortization schedules started around 15 years ago are finally paying more than interest accruing on pension debt. 

If investments continue to outperform assumptions and historically high contributions are paid, then we expect overall funded status to keep improving nationally in 2027. Yet, unfunded liabilities remain stubbornly above $1 trillion even as funded ratios improve, and several states and plans in particular are struggling.

Whether the past year’s improvements can last depends on financial market volatility, asset valuation accuracy, and funding discipline during the next recession.

State of Pensions 2026

Download the full State of Pensions 2026 report and fact sheets to dive deeper into the trends affecting public pensions:

Additional Resources