Answering Frequently Asked Questions About COVID-19 and Public Pensions
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Answering Frequently Asked Questions About COVID-19 and Public Pensions

This resource, designed for state legislators and staff, will assist in answering crucial questions regarding how the pandemic and resulting market conditions have affected state sponsored public pension plans.

As the coronavirus pandemic affects all aspects of life, state legislators may be receiving questions regarding public pension benefits offered by state and local employers. The Pension Integrity Project, an established pro-bono public pension consulting group, has compiled a list of possible questions and corresponding responses to assist in their communication efforts.

Have a Specific Question About Your State Pension Plan?

The Pension Integrity Project is available to answer any additional questions by email at

How will state-sponsored public pension plans be impacted by the COVID-19 pandemic?

The COVID-19 pandemic and related restrictions on economic activity have caused major investment losses and suppressed government revenue, both of which will have a negative impact on the solvency of state-sponsored retirement plans. The full extent of the impact is unknown at this time but the Pension Integrity Project recently released a new interactive web tool estimating that unfunded state pension liabilities could jump from $1.2 trillion before COVID-19 to between $1.5 trillion and $2 trillion at the end of the current fiscal year, depending on investment returns. You can use this tool to preview how your state’s individual plans would be affected by a variety of market scenarios.

How are public pension plan investments prepared to handle market volatility like that resulting from the coronavirus pandemic?

Most traditional state-sponsored defined benefit pension plans have historically assumed an investment return rate as high as 8 percent, even though the average annual return was just 5.87 percent between 2000 and 2018. Since the 2008 financial crisis, many public pension plans have adjusted slowly to the growing gap between actual and assumed investment returns and significant market changes. Additionally, a number of plans have chosen to expand high-risk investment holdings in private equity and other alternative assets in a search for greater yields over the past decade. Unfortunately, this trend has led most defined benefit pension plans to be more exposed to market volatility like that being experienced during the COVID-19 crisis.

Will the COVID-19 market crash force plans to raise employee contribution rates?

State-sponsored defined benefit plans depend on contributions from three sources to maintain funding levels and pay benefits: employee contributions, employer contributions, and investment gains. When any one of those sources of funds is reduced, the other funding sources must be increased or the system will continue to accumulate unfunded pension benefits. Thus, it is likely that employer and employee pension contribution rates are going to need to increase in the near term to offset investment losses and keep pace with growing unfunded liabilities. However, each state tends to take a different perspective on the relative share of contributions between employers and employees, so conditions will vary across states.

Will the COVID-19 market crash prevent retirees from receiving pension checks?

Generally speaking, it is a well-established principle that retirement benefits are guaranteed by federal and state constitutional protections and governing contracts. However, a scenario can occur where employers become delinquent in their contributions due to the lack of funds to contribute to plans, ultimately leading pension systems to adjust benefits themselves as an internal administrative matter, or local government employers can go into bankruptcy in response to the inability to honor their contractual obligations. This worst-case scenario can be avoided by maintaining fully-funded pension systems in good fiscal times. Fully-funded plans are more resilient and better able to weather volatility without imposing an unmanageable burden on employer budgets.

Does the fallout from COVID-19 make a future COLA less likely?

Because cost-of-living adjustments (COLA) are based on policies governed by individual pension systems, you should check with your specific system’s administrators to learn more about how COLAs may be impacted by the COVID-19 pandemic. For plans that have COLAs tied to statutorily fixed rates or actual increases in inflation, you should assume that those adjustments will occur as normal barring any legislative changes. For plans that have COLA’s tied to their funded status or given as a thirteenth check during years of extraordinary investment gains, you should check directly with your plan administration.

Does the state’s budget uncertainty impact the solvency of the pension system?

Yes, as state budgets are strained by decreased revenue and unexpected costs, state governments will likely have fewer funds available to supplement struggling pension systems. When pension plan investments underperform, as they will due to the market effects of the economic downturn and coronavirus pandemic, contributions from either the state or members need to increase in order for the system to stay on track and save enough to pay for future benefits owed In times of crisis, policymakers may be forced to allocate limited funds to more immediate needs at the expense of sufficiently contributing to the state public pension system. Any payments to the pension system below what is actuarially required will impact the long-term solvency of the plan by unnecessarily burdening future taxpayers and employees with more unfunded liabilities and even higher contributions.

What happens when the state doesn’t contribute its yearly pension payment because it is focusing on immediate emergency needs?

When state and local employers reallocate their pension fund contributions to emergency needs, like the COVID-19 public health and economic crisis, more contributions are required from members and/or investment returns. Due to the fact that investment returns will cause further loss and policymakers are unlikely to raise employee contributions at this time, plans will likely fall deeper into debt. The task of paying off the debt will fall on the shoulders of future generations who will need to contribute at higher levels – not only to stop the growth of future debt but to allow the pension system catch up with were plan actuaries said they should be in order to achieve their goal of fully funding accrued retirement benefits in the future.

Can states save money by limiting contributions to their pension plans to help with more immediate budget concerns?

In the long-run, no. Any short-term savings from limiting or canceling contributions to a public employee’s pension plan will be dwarfed by the long-term costs associated with paying off that pension debt over time. Cutting expenses by cutting pension contributions today means not only that they will need to be paid in full in the future, but even more will be needed to make up for the loss of investment returns on a smaller pile of assets. If contributions into a public pension plan are cut in the near-term, costs will increase at a more accelerated rate long-term.

Can strong investments save state-sponsored pension plans from insolvency long-term?

This is not likely. After the losses experienced during the 2008 recession, state-sponsored pensions plans were beneficiaries of a historic 10-year runup in the stock market. Yet, these pension systems barely returned to a national average of 74 percent funded.  Now that the historic bull market has come to a grinding halt, pension plan sponsors who had still hoped to invest their way out of the last two recessions will have to make some tough decisions to keep their plans solvent. Pension plan administrators and policymakers should take the lessons learned from three market recessions over the past 20 years and no longer rely on faith in strong investment returns to save their public pension systems from past and future debt.

If legislatures maintain the status-quo regarding the management of their states’ public pension systems, what will happen?

If policymakers default to maintaining the status quo despite drops in investment returns, the cost of providing a defined benefit pension option to public employees will increase at a greater rate in the intermediate- and long-term. Although immediate savings may be gained from not proactively responding to the effects of the economic downturn and COVID-19 fiscal fallout, these short-term savings will be dwarfed by future costs.

What happens to public pension systems if there is a prolonged recession?

In 2000, many defined-benefit public pension plans were at or near full funding. However, after the dot-com bubble collapse and post-9/11 recession, missed investment return assumptions and insufficient contributions eroded plans’ strong financial standing and created billions in unfunded liabilities going into the 2008 financial crisis and Great Recession. Over the proceeding 10-year historic bull market, most public pension plans reported continued growth in unfunded liabilities. For some plans this was due to de-risking policies being adopted, but most just could not meet investment assumptions and/or contribution rates. Regardless of the length and depth of the recession that may be sparked by the COVID-19 pandemic, unfunded liabilities will continue to grow at an accelerated rate if systemic public pension issues are left unaddressed.

What steps can state policymakers take to ensure the long-term stability of public pension retirement systems?

Step 1: Adopt better funding policies, risk assessment, and actuarial assumptions.

  • Lower the assumed rate of return to align with independent actuarial recommendations.
  • These changes should be aimed at minimizing risk and contribution rate volatility for employers and employees.

Step 2: Establish a plan to pay off the pension system’s unfunded liability as quickly as possible.

  • The Society of Actuaries’ Blue Ribbon Panel recommends amortization schedules be no longer than 15 to 20 years.
  • Reducing the amortization schedule would save the state billions of dollars in interest payments.

Step 3: Review current plan options to improve retirement security for a wider range of public employees.

  • Generally, somewhere between 40 percent to 70 percent of public employees hired in the typical state do not choose public service as their long-term career and leave their public employer before they vest in their public pension system. Fewer than 20 percent usually make it to a full, unreduced retirement benefit after 25 or 30 years.
  • As traditional pensions are likely to be more attractive to long-term career public employees, portable plans can provide more attractive benefits for those shorter-term employees.

Interested in more information about the impact of COVID-19 on public pension systems?

The Pension Integrity Project offers policymakers and pension plan stakeholders:

  • Customized analysis of pension system design, trends, and fiscal trajectory
  • Independent actuarial modeling to weigh the impact of policy scenarios
  • Assistance with stakeholder outreach, engagement and relationship management
  • Design and execution of public education programs and media campaigns
  • In-depth case studies on jurisdictions that have adopted reforms—highlighting key lessons learned
  • Peer-to-peer mentoring from state and local officials who have successfully enacted reforms

Together we can ensure public employees of all kinds receive their earned benefits and taxpayers are protected from unnecessary cost. Please email any questions to

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Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.

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