A solid year for the U.S. stock markets resulted in better-than-expected returns for state and local pensions last year. However, that boost may not be enough to pull them out of trouble.

Pensions notched an average annual return of 10.3% in 2024, higher than the projected 6.87%, according to a new report from Equable Institute, a think tank focused on pension research.12 Yet public pension returns still lagged behind the gains of the broader equity markets–the S&P 500 rose more than 23% in 2024.

The strong, but not stellar returns can be partly attributed to the lackluster performance of fixed-income in 2024. 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

In 2024, the public pension system faced a shortfall of $1.37 trillion, which is an improvement from $1.64 trillion in 2023. A funding shortfall occurs when pensions have more unfunded liabilities—or promised benefits to retirees—than assets.3

“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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