The pension system for state workers in New Jersey is so underfunded that it could run out of money in 12 years. Pennsylvania and Connecticut have taken steps to stabilize their systems, such as increasing state contributions, but policymakers face the prospect of high pension costs for years to come. And Colorado could deplete its retirement fund assets by 2044 because the state lacks policies to manage volatile financial markets.

These gloomy projections are among those in a first-of-its-kind simulation of state pension system funding conducted by The Pew Charitable Trusts. A new study, “Assessing the Risk of Fiscal Distress for Public Pensions: State Stress Test Analysis,” presents findings about the largest public employee plans in 10 states: Colorado, Connecticut, Kentucky, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Virginia, and Wisconsin. The John F. Kennedy School of Government at Harvard University published the report on May 23, 2018.

Not all of the 10 states assessed by Pew are in bad shape. North Carolina and Wisconsin, both hard hit by the Great Recession of 2007-09, fully fund their retirement systems by following well-designed contribution policies that are adjusted depending on economic conditions. Every state in the study has enacted reforms since the Great Recession and should expect declines in costs over time as savings are realized from those changes.

The analysis shows the advantages of nonpartisan, evidence-based financial stress testing to inform policymakers about the impact of economic uncertainty on a state’s ability to pay benefits to retirees. […]

Though Pew tested 10 states, the findings can apply to all. Among the general conclusions, the analysis shows that:

  • States with low pension fund levels and minimal contribution rates could face insolvency.
  • States with low funded levels that have increased pension contributions probably will not run out of money, but could pay permanently high costs if return targets are not met.
  • States with funding policies that do not respond to market downturns risk distress and insolvency.
  • Some state retirement system policies do not include adequate plans for managing costs in cases of extreme market volatility.
  • Policies that call for cost-sharing between employees and the state government reduce risk and make state pension costs more predictable.

See here for more details on these general conclusions and to read the full research paper.

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This article republishes selections from “Stress Testing Can Help Troubled State Public Pension Funds” by Greg Mennis & Stephen Fehr, an article published by Pew Charitable Trusts in June 2018.