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 /PRNewswire/ -- 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.
Underperforming investments, interest costs
and changes to assumptions are the primary drivers of unfunded
liabilities.
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.
Equable.org | Twitter: @EquableInst |
Facebook: @EquableInstitute | Instagram: @EquableInst
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SOURCE Equable Institute