Alice Morgan, Photo Illustration for Investopedia by Getty Images
What you need to know
- The stock market’s strength has allowed state and local pension returns to exceed expectations by 10,3% in 2024.
- While last year's returns were beneficial for the financial outlook of the public pension system, there's still more than $1.3 trillion worth of unfunded pension liabilities.
- Equable believes that if the state’s tax revenues remain stagnant, or even decline in the future, it is unlikely to reduce pension debt.
Last year, a solid stock market year in the United States led to better than expected returns for local and state pensions. But that may not have been enough to save them.
The Equable Institute’s new report on pension research shows that the return for retirement plans will average 10.3% annually in 2024. This is significantly higher than projected returns of 6.87%. Yet public pension returns still lagged behind the gains of the broader equity markets–the S&P 500 rose more than 23% in 2024.
Part of the reason for 2024’s poor performance by fixed income can be attributed to its strong but still not spectacular returns. And while they slightly improve the public pension system's financial status, it does little to alleviate all its problems.
"A second straight year of positive investment returns for public retirement systems has been most welcome," said Anthony Randazzo, Equable executive director. "But it's notable that even with markets at historic highs and strong pension fund investment returns, state and local retirement systems remain financially fragile."
Significant Debt Remains An Issue
A shortfall of 1,37 trillion dollars is expected in the 2024 public pensions system, compared to a deficit of 1.64 trillion dollars that was projected for 2023. A funding shortfall occurs when pensions have more unfunded liabilities—or promised benefits to retirees—than assets.
"The good news for state legislatures and local government employers is that three straight years of improved funded status for public plans prevented additional unfunded liabilities from piling up," the report states. "The bad news is that there is still more than a trillion in pension debt that can’t be paid down using today’s level of contributions."
Currently, the average market valued public pension ratio was 80.2%, but Equable considers the 'minimum threshold for pension plans to be considered resilient' to be 90%.
Going into 2025, the report doesn't paint a pretty picture—if state tax revenues hold steady or decline, pension plans are unlikely to be able to reduce their debt.
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