Funded status matters for public pensions because it measures whether or not the funding of a pension plan can keep up with the retirement benefits it has promised.
It’s a primary indicator of fiscal responsibility. However, it’s only the beginning when it comes to understanding the long-term sustainability of a retirement system.
Equable Insights
- Funded status: measures a pension fund’s assets against its promised liabilities to assess overall financial health
- Unfunded liabilities: measures the dollar difference between a pension fund’s liabilities and its assets
- Funded ratio: measures assets as a percentage of benefits promised
Why Pension Funded Status Matters
Funded status is important because it measures the dollars a pension fund has received and invested compared to the pension payments it needs to make.
For example, when we say the nation’s pension plans are 86.0% funded, we mean they have reported around $7.54 trillion in promised benefits and have roughly $6.48 trillion in assets.
It provides a snapshot in time of a plan’s fiscal health, indicating whether a pension system is on solid financial footing or if closer attention and corrective policy action are warranted.
How to Measure Fiscal Health: The Tools of Funded Status
While the funded ratio of a pension plan provides a helpful, point-in-time measure of funding progress on its own, it should never be considered as the only measure of fiscal health.
The dollar amount of unfunded liabilities implied by the funded ratio matters, too. This is especially true relative to the ability for the government sponsoring the pension plan to pay for that pension debt.
Nationally, the shortfall for U.S. pension funds is $1.06 trillion, or 3.2% of GDP, as of September 30, 2026[1]. So, at 86.0% funded, there is still plenty of money sitting around to pay promised benefits today. However, the cost of backfilling the shortfall in assets that 86.0% funded ratio represents — so that every pension promise is kept — requires an enormous amount of capital.
For any given state, it is helpful to consider the funded status alongside the unfunded liability and the ability for the sponsoring government to cover that funding shortfall. A pension plan that’s 90% funded with $20 billion in unfunded liabilities that are 4% of state GDP may be in more trouble than a pension that’s 60% funded with a $1 billion shortfall that is 0.5% of state GDP.
See Equable’s Funded Ratio Rankings for a sense of how the current 86.0% national funded ratio breaks out from plan to plan and state to state.
Problems Beneath the Surface: Return Assumptions and Asset Valuations
A key way to think about funded status is as a snapshot based on a pension plan’s current accounting rules. In other words, a plan’s financial picture could be better or worse depending on alternative assumptions or methods.
Assumed Rate of Return
First, the funded status of a pension plan is very sensitive to the assumed rate of return and discount rate adopted by the board.
For example, Texas Teacher Retirement System (TRS) used an 8% assumed rate of return for nearly two decades. Going into calendar year 2018, TRS reported it was 81% funded. In August 2018, the TRS board adopted a 7.25% assumed rate of return, which meant revaluing its promised benefits. The reported value of liabilities jumped from $182 billion to $200 billion, meaning its unfunded liabilities increased from $34 billion to $45 billion. The TRS funded ratio fell to 77%.[2] Nothing changed with the health of TRS except that the board improved the reasonableness of its assumptions.
Nationally, the funded status of public pension benefits could be much lower using different accounting principles.[3]
Value of Assets
Second, the way assets are valued also matters. Pension funds can report their funded status using actuarial value or market value. Because actuarially valued assets typically phase in investment gains and losses over a five-year period, in the years after a sharp market downturn the funded status on an actuarial basis might look better than it is in reality (though measuring this way avoids overemphasizing one bad year of volatility).
By contrast, in the year after a strong investment return, the funded status on an actuarial basis might not look as healthy as it is on a market basis.
Why an 80% Funded Ratio Is Not Good Enough
Ideally, the funded ratio of a pension plan is 100%, with $0 in unfunded liabilities. Of course, a pension plan might fluctuate from year to year around that mark. Over time, however, a pension plan should aim to stay consistently fully funded.
In any given year, the funded ratio could be 90% or 80% without cause for concern. The problems emerge when a pension fund consistently performs at a lower-than-ideal level year after year. Remaining persistently 60% or 80% funded means maintaining an unfunded liability and, as a byproduct, unfunded liability amortization payments. Continuously maintaining a low funded ratio means perpetual pension debt payments. And that takes money away from other public goods and services.
Several years ago, a myth emerged that an 80% funded ratio was “good enough.” This was resoundingly rebuffed by the actuarial community. It is reasonable to think that since, at 80% funded, there is plenty of money to pay benefits, there shouldn’t be concerns about the fiscal health of a pension plan.
However, problems emerge when a pension plan is 80% funded persistently year after year. Among those problems is that persistent payments to backfill unfunded liabilities crowd out dollars otherwise intended for infrastructure spending, park improvements, or programs to support education equity, for example.
Funded Status as a Fiscal Indicator, Not a Final Destination
Ultimately, funded status provides a target for fiscal responsibility. It helps pensions to regularly assess whether the factors going into the funded status are accurately measured. Are assets growing at a rate necessary to keep promises to public workers? Are benefit values being accurately measured? Is the value of assets being appropriately measured? Is the funded ratio relative to the ability of the sponsoring government to backfill any funding shortfall a concern?
Funded status is important as a measure of progress or erosion. But, as noted, it should be just the first step in understanding what can be done to ensure the long-term sustainability of a retirement system.
Notes
- Source: State of Pensions Funded Ratio and Unfunded Actuarial Liability calculated by Equable Institute
- Source: Teachers Retirement System of Texas actuarial valuations for fiscal years ending 2017 and 2018.
- Source: Market Funded Ratio calculated by Equable Institute
