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US. The State Pension Funding Gap: Plans Have Stabilized in Wake of Pandemic

The nation’s state retirement systems finished the 2021 fiscal year in their best condition since the Great Recession of 2007-09. According to projections by The Pew Charitable Trusts, the gap between the cost of pension benefits that states have promised their workers and what they have set aside to pay for them dropped in 2021 to its lowest level in more than a decade. Pew estimates that state retirement systems are now over 80% funded for the first time since 2008.

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Such progress would be significant in any year, but the improvement in fiscal 2021 occurred during a recession in which many analysts predicted that revenue losses related to the COVID-19 pandemic would increase retirement fund shortfalls. Instead, Pew found an increase in assets of over half a trillion dollars in state retirement plans, fueled by market investment returns of more than 25 percent in fiscal 2021 (the highest annual returns for public funds in over 30 years) and substantial increases in contributions from taxpayers and public employees to pension funds.

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These contribution increases, which came after years of states shortchanging their systems, are part of an upward trend over the past 10 years. Pew research shows that contributions have increased an average of 8% each year over the past decade, boosting assets and paying down debt. In the four states with the most financially troubled pension systems—Illinois, Kentucky, Pennsylvania, and New Jersey—contributions increased by an average of 16% a year over the same period.

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Nearly every state has also enacted benefit reforms to lower costs, including cutting benefits for newly hired public workers. Officials in many states have also become more disciplined about managing pension finances, using tools such as stress testing to determine how twists and turns in the economy might affect pension funds.

Read more @PEW

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