Public pension funded ratio rises to 80.6% due to strong market performance, but interest costs and improved accounting policies slow improvement to funded status.
NEW YORK, July 16, 2024 - State and municipal retirement systems are on track to outperform their investment targets and experience solid improvements to the national average funded ratio in 2024, according to Equable Institute's State of Pensions 2024 report. While last year's investment gains left unfunded liabilities stagnant at $1.61 trillion, bringing the national aggregated funded ratio to 75.8%, 2024 is likely to be a more positive year for pension funded status on average. Equable estimates that the aggregate funded ratio for U.S. state and local pension funds will rise to 80.6% in 2024, and unfunded liabilities will decrease slightly to $1.34 trillion.
Despite positive signals for America's public retirement systems this year, unfunded liabilities have remained paralyzed at or above the $1 trillion level since the Great Recession. A new historical analysis of the root causes of pension debt finds that underperforming investment returns, interest costs that outpace contributions, and improvements to actuarial assumptions are the primary drivers of these persistent unfunded liabilities.
"Since the pandemic, the year-to-year changes in public pension funded status have been more volatile, in part because of increased volatility in financial market returns," said Equable executive director Anthony Randazzo. "This was a good year for pension plans, with a solid improvement in the national average funded ratio. But this welcome annual improvement hasn't been enough to break the country out of its pension debt paralysis, as public plans still have over $1.3 trillion in unfunded liabilities. Plus, a range of headwinds — including negative cash flow trends, growing interest on pension debt, and the looming threat of a financial market correction — could easily lead to a funded status reversal next year."
Looking back on a year of mixed market signals, the analysis concludes that the state of pensions remains fragile. Specifically, the report finds:
Preliminary 2024 investment returns for state and local plans are 7.4% on average, through June 30, 2024. Most public pension plans are projected to overperform their assumed return targets (6.9% on average). The net result is a clear improvement in funded ratio, and modest improvement to unfunded liabilities.
Pension fund allocations to private capital increased again to a historic high of 13.7% — a reported value of $694 billion as of 2023. This has driven up the share of pension fund investments that are exposed to valuation risk to 27.9%. Investments in all alternatives continue to be more than one-third (33.8%) of pension fund assets.
Employer contribution rates have passed 30% of payroll on average for the third year in a row. More than two-thirds of costs are for unfunded liability payments.
Unfunded liability payments have risen 1,388% since 2001, while normal cost payments have risen just 40%.
Current cost-of-living adjustment policies are insufficient to ensure public pension benefits keep pace with inflation. The average COLA paid in 2023 was 2.02%, below the national inflation rate at 3%. Additionally, 31.3% of benefit tiers offered no inflation adjustment at all.
The report, State of Pensions 2024, analyzes trends in public pension funding, investments, contributions, cash flows, and benefits for 245 of the largest statewide and municipal retirement systems in all 50 states (e.g., retirement plans with at least $1 billion in accrued liabilities).
For a deeper look into The State of Pensions 2024, visit http://www.equable.org/state-of-pensions-2024 to access additional downloads and interactive data visualizations. Media tools including figures, fact sheets and raw data can be found here.
About Equable Institute
Equable is a bipartisan non-profit that works with public retirement system stakeholders to solve complex pension funding challenges with data-driven solutions. We exist to support public sector workers in understanding how their retirement systems can be improved, and to help state and local governments find ways to both fix threats to municipal finance stability and ensure the retirement security of all public servants.
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SOURCE Equable Institute
