Most public pension plans raised employee contribution rates in the last decade, report shows

In September 2021, the National Association of State Retirement Administrators (NASRA) released an issue brief detailing trends in the contributions made to state-level public pension plans. The report found that 80% of states have increased the required employee contributions to their pension plans since 2009 and the average contribution rate for employees has risen 1.25% since the Great Recession of 2007-2009.

These increased contributions point to a shift in funding philosophy, from an employer-funded obligation to more of a shared-funding philosophy between public employees and government employers.

The brief shows 40 states raised contribution rates on employees after the Great Recession. Key holdouts include Wisconsin and South Dakota, two states with very well-funded public pension plans that adjust benefit levels rather than raise and lower contribution rates during periods of exceptional or poor investment performance.

Other holdouts are Kentucky, Oklahoma, and Alaska— three states with alternate retirement designs. Kentucky has had a cash balance plan since 2014, while Oklahoma and Alaska have had new employees in defined contribution plans since 2014 and 2006 respectively.

The remaining five states that did not raise employee contributions were Illinois, Indiana, North Carolina, Massachusetts, and Rhode Island. Indiana’s public employee plan has had employer pick-ups of employee contributions since its inception, while Illinois, North Carolina, Massachusetts, and Rhode Island set their employment rates in statute, therefore not sharing the risks of down markets with taxpayers.

The National Association of State Retirement Administrators found median employee contributions remained relatively flat, at around 5% of pay from 2001-2011. After the dust settled after the Great Recession ended in 2009 and state legislatures had a better idea of their public pension plans’ finances, required contributions from employees began to steadily rise throughout the 2010s, settling at a median of 6.25% of pay in 2020.

The average pension plan became increasingly more expensive through the 2010s due to the shift in market experience revealing a more accurate accounting of public pension costs. This necessitated the adoption of more conservative actuarial assumptions, namely the assumed rate of return on investments. When a pension plan assumes it will earn less on its investments while keeping the same benefit structure in place, the only lever left to fill the gap in funding is through increasing its employee and/or employer contributions.

During the last decade, state legislatures and retirement boards also began to implement risk sharing in their public pension plans, which had historically put the burden of investment risk on taxpayers. Risk-sharing articulates that employee contribution rates may change depending on plan investment returns or other actuarial and demographic factors. (For more information on risk-sharing, read our Best Practices in Incorporating Risk Sharing into Defined Benefit Pension Plans paper here.)

Contributions from employees are important to keep the funded status of statewide pension plans on an upward trajectory. The past 10 years have shown that pension boards and state legislatures are starting to see the importance of this concept as well. Some states which did not require contributions before the 2009 recession, now do. Most other states have raised employee and employer contribution rates to keep up with the funding demands of the average statewide defined benefit pension system. Continuing to advance these policies, alongside forward-thinking shifts in plan choice and continuing to draw down outdated investment return assumptions, will put public pension systems on a better foundation moving into the future.