State Pension Funds in Peak Health, Despite Pandemic
The nation’s state retirement systems finished the 2021 fiscal year in their best condition since the Great Recession of 2007-09, according to projections compiled by the Pew Charitable Trusts.
The public policy nonprofit found the gap between the cost of pension benefits that states have promised their workers and what they have set aside to pay for them dropped in 2021 to its lowest level in more than a decade.
Pew estimates that state retirement systems are now over 80% funded for the first time since 2008.
The Pew findings fly in the face of expectations from many analysts who predicted revenue losses related to the COVID-19 pandemic would increase retirement fund shortfalls.
Instead, Pew found an increase in assets of over half a trillion dollars in state retirement plans, fueled by market investment returns of more than 25% in fiscal 2021 (the highest annual returns for public funds in over 30 years) and substantial increases in contributions from taxpayers and public employees to pension funds.
These contribution increases, which came after years of states shortchanging their systems, are part of an upward trend over the past 10 years.
Pew research shows that contributions have increased an average of 8% each year over the past decade, boosting assets and paying down debt. In the four states with the most financially troubled pension systems—Illinois, Kentucky, Pennsylvania, and New Jersey—contributions increased by an average of 16% a year over the same period.
Nearly every state has also enacted benefit reforms to lower costs, including cutting benefits for newly hired public workers, Pew said.
At the same time, it noted officials in many states have also become more disciplined about managing pension finances, using tools such as stress testing to determine how twists and turns in the economy might affect pension funds.
As a result, Pew found that for the first time this century, states are expected to have collectively met the minimum pension contribution standard.
In landmark research published in 2010, Pew identified a sizable funding gap between what states had promised their retirees and what they had put aside preceding the recession—a gap that ultimately grew to over $1 trillion by 2015.
Using the June 30, 2021, returns, Pew now projects the gap, or unfunded liability, could fall below $1 trillion due to a combination of policymaker efforts and windfall investment returns.
Despite the encouraging trend, the Pew Charitable Trust warned that public pension funding can be volatile. To continue to pay promised benefits while reducing pension debt, state policymakers must employ strategies to keep up with scheduled contributions—which is easier to accomplish with a plan to address future uncertainty, Pew said.
Successful state pension systems, such as those in Wisconsin, South Dakota, and Tennessee, have maintained high funded ratios over the past 20 years in part because they have strategies—including policies that target debt reduction and share gains and losses with workers and retirees—to mitigate cost increases during economic downturns.
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