Pension Reform News: Report finds $1.59 trillion in public pension debt

In This Issue:

Articles, Research & Spotlights 

• New Reason Report Spotlights $1.59 Trillion in Public Pension Debt
• Connecticut’s Path to Fully Funding Pensions

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Reason’s Annual Pension Solvency and Performance Report

The Pension Integrity Project at Reason Foundation released its inaugural Pension Solvency and Performance Report, aggregating and comparing key funding and investment measurements, actuarial assumptions, and other performance indicators of government-run pensions. Leveraging data from 191 state and local public pension systems in the United States, the report shows total public pension debt rose to $1.59 trillion at the end of 2023, most of which (88% of the debt) was held by state governments. In aggregate, state and local governments only have 76% of the funds needed to fulfill pension promises made to public workers. The report also uses recent market outcomes to estimate 2024 funding measurements and finds that governments—and, therefore, taxpayers—could see public pension debts more than double if a recession were to occur in 2025. The interactive tool displays the investment outcomes of every major public pension system so users can see how their plan has performed compared to the plan’s assumptions and the rest of the country. It also examines the significant growth in annual costs that all public pensions have undergone over the last decade, as well as many other useful measurements to better understand the challenges facing public pension systems today. The interactive tool is available here.

The Case for Connecticut’s Fiscal Guardrails

Facing significant growth in pension debt and severely underfunded retirement plans, Connecticut lawmakers passed major funding reforms in 2017 to direct excess revenue to pay down debts owed by the State Employee Retirement System and the State Teacher Retirement System. Since adopting this policy, Connecticut has allocated $7.7 billion in budget surpluses to the plans, improving their funding from 36% in 2016 to 50% in 2023. In collaboration with the Yankee Institute, Reason Foundation recently published a new paper examining the impact of this additional funding and the path forward for Connecticut’s two largest pensions. Using actuarial modeling, the paper finds that continuing extra payments (maintaining the $1 billion payments each year that the state has made in the last few years) could eliminate all the state’s pension debt by 2038. This would save taxpayers over $6 billion in total costs in the long run. The analysis also shows that Connecticut’s pensions, which remain dangerously underfunded, are at a significant risk of future recessions.

News in Brief

Public Pensions’ Growing Bet on Private Equity Defies Political Divides
A recent paper by Sarah F. Anzia (University of California, Berkeley) and Mark Spindel (Potomac River Capital), titled “Labor’s Capital: Public Pensions and Private Equity,” finds that the increase in public pension fund investments in private equity over the last two decades is not associated with partisan leadership or union strength. Analyzing pension funds across the U.S., the study finds that both Democratic- and Republican-controlled states have significantly increased their private equity allocations, with average targets rising to 10% of total assets under management by 2022. The rise in private equity investments by public pensions was driven by several factors, including the expansion of the private equity industry following the Sarbanes-Oxley Act of 2002, near-zero interest rates after the 2008 financial crisis making capital cheap, and the visible crisis in public pension funding that required new ways to achieve high returns. Despite frequent public criticisms of private equity labor practices, the paper reflects on how the economic need to achieve high returns has blurred traditional left-right political divides. The full paper can be found here.

Hybrid Retirement Plans Are Gaining Traction

A recent National Association of State Retirement Administrators (NASRA) issue brief explores the growing adoption of hybrid retirement plans by state and local governments. Hybrid plans combine elements of defined benefit (DB) and defined contribution (DC) plans and are primarily of two types: cash balance plans and DB-DC combination plans. Cash balance plans merge features of pensions and individual accounts, while DB-DC plans combine a reduced DB benefit along with a supplemental DC account. The brief highlights that one-size-fits-all retirement plans do not adequately address the diverse needs of the modern workforce, prompting states to adopt hybrid plans to provide more flexible options. In 2024, four states have adopted a cash balance plan for public workers, while 14 states now use a DB-DC combination hybrid plan. These plans maintain mandatory participation, shared financing, and lifetime income payouts to support retirement security. The full brief can be found here.

Quotable Quotes on Pension Reform 

“There’s no way to invest your way into this [granting teachers a COLA]. Not without taking excessive risk, and really then all you’re doing is kind of gambling and hoping it turns out OK, which is incredibly irresponsible.”
—Brian Grinnell, former Ohio State Teachers Retirement System chief actuary, quoted in “Ohio State Teachers can’t invest its way to permanent COLAs, former chief actuary says,” Pensions & Investments, Oct. 2, 2024. 

“This bill has been vetoed four times over the past five years because this pension enhancement would impose substantial unbudgeted costs on the state.”
—New York Gov. Kathy Hochul quoted in “NY Gov. Hochul rejects police pension bill after union attacks her,” Gothamist, Oct. 4, 2024. 

“It would be imprudent to revive a policy to fund pension contributions with dedicated fine/fee revenues because those revenues can fluctuate over time, while pension liabilities are always locked in.”
—Leonard Gilroy, senior managing director of Reason Foundation’s Pension Integrity Project, quoted in “Missouri Amendment 6: Should court fees fund retirement for sheriffs and prosecutors?,” The Missouri Beacon, Oct. 2, 2024.

Data Highlight

Each month, the Pension Integrity Project features a pension-related chart or infographic of interest generated by our team of analysts. This month, we are showcasing the first installment of Reason Foundation’s Annual Pension Solvency and Performance Report. The report contains in-depth statistical analysis and originally compiled data on funding levels, investment performance, and liabilities of this country’s largest public pension plans. This visualization features investment return data to show how most pensions failed to achieve their expected returns over the last 20 years.

Distribution of Excess Returns of Public Pension Plans (2001-2023)

Source: Annual Pension Solvency and Performance Report by the Pension Integrity Project at Reason Foundation. Data was collected from the annual reports of 191 public pension systems.