Depoliticizing public employee pension plans: Building robust legal and structural guardrails for sustainability 

The hard-won public pension reforms of recent years remain vulnerable to constant political pressure. Political leaders must deal with demands from both plan stakeholders and the general public to address exigent budget demands (e.g., Medicaid funding due to federal cutbacks). Public spending challenges can tempt lawmakers to make decisions that can harm the longer-term goal of properly and prudently designing and managing public pension plans.  

To secure the future of these traditional defined benefit (DB) pension plans, legislatures and policymakers must consider how the political process can contribute to unsound pension benefit design and funding and establish structural guardrails to protect against those risks. This commentary examines functional and systemic gaps in the political process that should be addressed, compares them to the framework used in the private sector, and proposes a list of achievable structural reforms, with examples of states using them to good effect. 

Gaps in public pension benefits and funding management contrasted with ERISA standards 

State and local government DB pension systems are vulnerable to the political processes that determine how they are designed and funded. Governing bodies are generally unconstrained in their ability to grant pension benefits and set (or not set) the rules by which those benefits are funded. There generally are no minimum legally mandated design, funding, or plan management standards, unlike the federal Employee Retirement Income Security Act of 1974 (ERISA) framework for private sector DB plans. The gaps include:  

Lack of enforceable contribution requirements: State and local government pension plan sponsors are generally not legally required to make actuarially determined contributions (ADCs), allowing chronic underfunding in many plans. This often lets immediate budgetary priorities override funding for pension benefits (e.g., Illinois, New Jersey, Kentucky). The fiduciary boards administering the plans typically lack authority to enforce funding. Additionally, public sector plans often employ actuarial funding methods that are not typically permitted for private plans. For example, many public plans use a level percent of payroll instead of a level dollar (equal $ per year) method to amortize unfunded liabilities, which pushes payment obligations to the latter part of the amortization period. For example, Illinois and New Jersey use a level percent-of-pay amortization over 15 to 20 years.  

Contrast: ERISA mandates minimum required contributions and requires full level dollar funding over seven years for shortfalls. Non-compliance triggers IRS excise taxes (26 U.S.C. § 4971). This more aggressive amortization mandate results in private plans averaging near 100% funding levels versus public plans’ 77% aggregate funding level. 

Political influence over DB benefits and funding: Public employees, retirees, and their representatives often have strong influence over public policymakers that can result in benefit enhancements (often for past service) that create new unfunded liabilities with little regard to the burden on current and future taxpayers and participants. Political pressure can even lead to benefit increases for poorly funded plans (e.g., Rhode Island’s 2025 cost-of-living adjustment (COLA) adding over $400 million in liabilities to a pension already below 65% funded). 

Contrast: ERISA restricts benefit increases in underfunded private sector plans (<80% funded, 29 U.S.C. § 1083), enforced by the Department of Labor and Internal Revenue Service, minimizing unfunded liabilities. 

Inability to change future benefit accruals for existing employees: Many states have legal (typically court-imposed) restrictions that lock in major benefit structures for an employee’s entire career, limiting the employer’s ability to make changes due to changing circumstances, even for future service. 

Contrast: ERISA protects accrued benefits from changes but allows benefit adjustments for future service.  

Absence of employer-defined guidelines for managing investment and funding risk volatility: Many public plan sponsors have not established clear funding risk parameters for the fiduciary boards responsible for managing their plans. Without risk guidelines, there can be a mismatch between the plan sponsors’ tolerance for funding volatility and the investment risks being taken. If the investment return assumption is overly optimistic or too conservative compared to the actual expected return based on investment allocation (e.g., 7.5% vs 6.0%), funding may be higher or lower than needed. Despite progress being made with many plan fiduciary boards reducing investment return assumptions, some remain overly optimistic (see the National Association of State Retirement Administrators list of plans with greater than 7.0% return assumptions) and/or may allocate funds to volatile assets (e.g., the California Public Employees Retirement System (CALPERS), which has private equity investments taking up to 40% of the portfolio). This can cause unpredictable contribution increases if expectations fall short, straining participating employers’ budgets in unexpected ways.  

Contrast: ERISA sets explicit funding and investment risk guardrails to help ensure proper and more consistent funding of pension promises. Private sector employers proactively define investment policies in plan documents, specifying asset allocation limits, risk tolerances, and return assumptions. IRC Section 412 minimum funding standards require return assumptions more aligned with high-quality corporate bond yields, resulting in 5.0%-6.5% return assumptions for liability calculations for most plans. Private sector employers appoint and direct fiduciaries accordingly and monitor adherence to these risk parameters, retaining authority to adjust policies to align with funding needs. Failure to manage pension funding within these parameters can result in the imposition of federal excise taxes on the employer. 

Pension board missions may drift from core benefit objectives of the pension plan: Pension fiduciary bodies can veer from the plan’s core mission to deliver promised benefits toward politically driven agendas. While state fiduciary laws impose legal standards of loyalty, prudence, and impartiality, when plan sponsors fail to establish objective employer-driven guardrails for plan management and investments, governing boards are more likely to include non-financial considerations. Retirement boards are not legislatures. They are fiduciaries entrusted with safeguarding billions in assets for the exclusive benefit of retirees. When non-financial values take precedence—absent actuarial or performance justification—the result is mission drift. Taxpayers, participants, and employers ultimately bear the cost if returns suffer or liabilities balloon.  

Contrast: ERISA plans are less susceptible to mission drift toward non-financial considerations due to more clearly defined, stringent fiduciary standards. ERISA (29 U.S.C. § 1104) requires fiduciaries to act solely in participants’ financial interests, prioritizing returns and diversification. Non-financial considerations are permissible only if they do not sacrifice returns or increase risk (Department of Labor (DOL) Interpretive Bulletin 2015-01).   

Both public and private sector plans face non-financial factor pressures, but ERISA’s federal oversight, legal accountability, and risk of litigation by participants for breaches of fiduciary duties of prudence and loyalty limit the impact compared to public plans’ exposure to local politics, third parties, and stakeholder advocacy.  

Politicized governmental investment policies: State and local government plan sponsors can and often do impose nonfinancial social policies on pension investments (e.g., in-state investing; diversity, equity, and inclusion (DEI); environmental, social, and governance (ESG); tobacco; or fossil fuels). While these interests can be the prerogative of governments in their role as sovereigns, the inherent political nature of this, as it applies to pension funding, can negatively impact the otherwise prudent balancing of risk and return fiduciary objectives, resulting in lost investment returns. 

Contrast: ERISA’s fiduciary standards strictly prioritize fiduciary investment decisions for the exclusive benefit of the plans’ participants. This focus on balancing risk and return considerations puts at least some constraints on non-financial influences and ensures prudent investments without the distraction of various social or political causes.  

Public pension management reforms to reduce unreasonable political influence 

Legislatures and other public policymakers should examine the level of systemic and functional gaps in public pension benefit and funding management for their plans and implement necessary reforms. The following table provides a list of potential specific actions that can be implemented, ranked by impact and feasibility. Examples of each currently being used in states are provided.  

Many political vulnerabilities that threaten sound design and funding of public pensions can be addressed with apolitical guardrails. The systemic and functional gaps in public pensions contrast sharply with the rigorous ERISA standards that protect the private sector from improper and harmful perverse incentives. State and local policymakers should pursue reforms to protect public pensions from these politically driven incentives. 

The success of several states, including Wisconsin, South Dakota, Colorado, Arizona, Tennessee, Utah, Michigan, Oklahoma, and Texas, demonstrates that statutory ADC mandates, automatic adjustments, dedicated revenues, and independent oversight promote sustainability. Shared contribution structures and clear funding requirements can remove the temptation to grant unfunded benefit enhancements. By implementing well-established structural reform mechanisms, legislatures can reduce the influence of political considerations on pension benefits and funding, ensuring the stability of these pension systems and avoiding undue burdens on taxpayers and other stakeholders.