US. As Pension Funding Levels Fell in 2022, Higher Contributions Helped States Manage Debt
From fiscal year 2021 to 2022, the reported funding gap for state pension plans—the disparity between promised benefits and available assets—jumped by $439 billion to $1.27 trillion. The increase, largely fueled by investment losses, highlights how volatile financial markets continue to expose state and local governments to risk.
Yet, despite poor investment returns, in 2022, 49 states still contributed enough to their pension plans to meet a key target, the net amortization benchmark, which measures whether employers’ payments are sufficient to prevent pension plan debt—the share of benefit obligations that cannot be paid for with existing assets—from growing. These contributions helped states collectively pay down $61 billion in pension debt.
To help state policymakers and stakeholders understand the fiscal sustainability of their states’ pension policies, each year The Pew Charitable Trusts reviews the most recent comprehensively available state pension data and updates its Fiscal Matrix of key actuarial, financial, and budgetary risk metrics. For fiscal 2022, the data shows significant improvement in plans’ cash flow and in the adequacy of employers’ contributions to pension funds. However, challenges in managing contribution volatility and long-term risk persist.
Reduced funded ratio
The overall funded ratio—the share of pension liabilities matched by plan assets—dropped to 74% in 2022 from 82% in 2021. The typical plans’ investments lost 7.77% in the fiscal year ending June 30, 2022, according to data from Wilshire TUCS, resulting in a $191 billion loss as reported in state pension plans’ 2022 disclosures. And because the typical pension plan expects to generate average returns of around 7% annually, the gap between expectations and actual performance was in the double digits for most state plans.
Although the overall funded ratio fell in 2022, it was still above the 69% level recorded in 2020. Overall, 39 states’ funding ratios rose from 2020 to 2022, after accounting for both the windfall investment returns of 2021 and the subsequent correction. Fifteen states had ratios of at least 80%, and four—New York, South Dakota, Tennessee, and Washington—were at or above 100%.
49 states met or exceeded required contributions in 2022
Although investment returns drive short-term ups and downs in pension funding, long-term sustainability comes from consistently making adequate contributions to stabilize plan funding and pay down pension debt.
The net amortization benchmark, calculated as the sum of the cost of new benefits and interest on existing pension debt less employee contributions, provides a metric for evaluating how states are faring in that effort. States that meet or exceed this measure can expect to see their funding gaps stabilize or shrink over the long run. In 2022, overall employer contributions plus interest to state pension plans totaled $155 billion, a $23 billion increase from the previous year, and all but New Mexico met the benchmark, up from 39 in 2021 and just 17 in 2014.
This performance was aided by the strong investment returns in 2021, which lowered the net amortization benchmark. Windfall investment yields cut the aggregate funding gap by $548 billion at the start of 2022, which in turn lowered interest on reported pension debt by about $37 billion. As a result, the amortization benchmark fell from $133 billion in 2021 to $94 billion a year later.
However, because the benchmark is subject to investment volatility, assessing contribution adequacy over time can help clarify the picture of plan sustainability. From 2018 through 2022, 36 states had positive amortization, meaning they made contributions that were large enough to pay down pension debt. Another four had stable amortization, with payments that were adequate to prevent debt from growing. And 10 states’ contributions were insufficient to cover benefits and interest over the four-year period, resulting in negative amortization and growing pension debt.
Most Plans Had Enough Money to Pay for Current Employee Benefits and Interest on Their Debt
The $24 billion increase in employer pension contributions plus interest from 2021 to 2022 included states where policymakers chose to make supplemental payments—contributions above and beyond the required actuarial rates. Like any debt, paying down pension liabilities saves money over the long term.
States can use windfall revenue and budget surpluses to make additional payments toward pension debt, improving their balance sheets and building a cushion against future downturns. Arizona, Connecticut, Colorado, Kansas, and Oregon all made supplemental 2022 pension payments out of state and local budgets and by issuing pension obligation bonds.
Fiscal sustainability matrix 2022
To help policymakers navigate the inherent uncertainty of pension management and assess the resiliency of their plans, Pew created a 50-state matrix of fiscal sustainability. This tool collects critical information into a single table to highlight the practices of successful states and facilitate comparative analyses, using three sets of metrics:
- Historical actuarial metrics are the foundation of any fiscal assessment and show how past policies contributed to plans’ current financial position. But they provide little information with which to assess future investment or contribution risks.
- Current financial metrics, based on historical cash flows and funding patterns, provide the information necessary to assess whether a plan is adhering to funding policies that target debt reduction or is at risk of fiscal distress, such as underfunding or insolvency.
- Budgetary risk metrics provide essential information to help policymakers plan for uncertainty or for volatile costs and to prompt reforms when needed to ensure that pension plan costs and risks, which are largely borne by state and local budgets, do not crowd out other important public investments.
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