The Fiscal Health of State Pension Plans
Funding gap continues to grow
This fact sheet has been revised since initially issued to reflect updated data and feedback from five states (ID, MD, NH, NJ, SD). As a result, total pension debt facing state pension plans has been revised to $915 billion from $914 billion. Pew analysis also shows that 15 states made their full contributions rather than 14.
Based on the most recent comprehensive data, the gap between what state and local governments have promised in pension benefits to their workers and the funding to meet those obligations continues to widen. New data for fiscal year 2012 show that state-run retirement systems had a $915 billion shortfall. When promises by local governments were factored in, the total pension debt was over $1 trillion.
Since the financial crisis of 2008, policymakers have increasingly focused attention on the fiscal health of staterun retirement systems. A combination of investment return shortfalls, missed contributions, and unfunded benefit increases had left states with a $452 billion unfunded liability for pensions in fiscal 2008; by 2010 this funding gap had grown to $757 billion.
In spite of recent strong investment returns, the new data show that the funding gap for state plans has continued to grow—increasing by $158 billion from 2010 to 2012. This figure represents 14 percent growth, adjusted for inflation, and is primarily the result of states continuing to acknowledge the investment losses suffered in fiscal 2009. Because most state pension plans smooth out gains and losses over five years, they would not finish absorbing the impact of the market collapse until fiscal 2013.
Many states have enacted reforms since the financial crisis hit. And if pension plans meet their investment return targets and government sponsors make recommended contributions to their retirement systems, states can expect to see funding levels start to rise in future years. But investment returns are uncertain, and policymakers in many states fell short of paying for pension debt in 2012, an aggregate shortfall of $21 billion. Only 15 states have consistently made at least 95 percent of the full actuarially required contributions for their pension plans from 2010 through 2012; the remaining 35 states fell short in at least one year.
Pew’s work on public-sector retirement systems is conducted in partnership with the Laura and John Arnold Foundation.
The main sources for this update were the Comprehensive Annual Financial Reports produced by each state and pension plan for fiscal year 2012; in total, Pew collected data for 235 pension plans. State actuarial valuations were another key source. Pew’s data is based on the numbers reported by state pension plans and utilizes the plans’ own actuarial assumptions, which include the expected rate of return on investments and estimates of employee life spans, retirement ages, salary growth, retention rates, and other demographic characteristics.
Pew’s work has followed a consistent methodology since the first Pew pension report in 2007. Because Pew relies on each state’s publically available pension numbers, rather than utilizing Pew’s own projections or estimates, this update is based on data for fiscal year 2012 – the latest year for which comprehensive numbers have been released.
While strong investments in 2013 are expected to help state pension plans recover, the impact will be muted; most state pension plans smooth out gains and losses over time—typically five years—which means that the investment losses from 2009 won’t be completely incorporated into plan funding data until 2013, and 2013 investment gains won’t be fully acknowledged until 2017.