Public pensions in the United States

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Public pensions are the mechanism by which federal, state and local government employees in the United States receive retirement benefits.

According to the United States Census Bureau, there were 3,992 public pension systems in the country as of 2013. Of these, 231 were state-level programs, while the remaining 3,761 were administered at the local level. As of 2013, membership in the country's various pension systems totaled 19,546,452. Of these, 14,222,906 were active members.

HIGHLIGHTS

Between fiscal years 2008 and 2012, the funded ratio of the country's state-administered pension plans decreased from 84.3 percent to 72.4 percent.

The country paid 77 percent of its annual required contribution, and for fiscal year 2012 the pension system's unfunded accrued liability totaled $822 billion.

This amounted to an average of $3,029 in unfunded liabilities per capita.

According to a 2013 report by Morningstar, an independent financial research group, most states' pension plans continued to be underfunded below the 80 percent considered necessary for a healthy fund. Decreased funding and increasing liabilities since the 2008 recession continued to put pressure on local and state budgets, in some cases leading to bankruptcy. Higher pension costs can have the following consequences:

• higher taxes
• less intergovernmental aid for services
• lower credit ratings
• higher interest rates on state borrowing

Background

Pension systems vary greatly across the states in their organization, management and accounting principles, and are extremely complicated and difficult to compare. The basic information on this page comes from the U.S. Census Bureau, as reported by the states and pension funds themselves for fiscal year 2013. Also included are comparative data from three different reports, which looked at the states' Comprehensive Annual Financial Reports (CAFRs). The Pew Center report and Morningstar had very similar data: both found that pension funds in the U.S. altogether were roughly 72 percent funded in 2012. The State Budget Solutions report, using a lower rate of return to calculate assets in the future, estimated that total unfunded liabilities in the United States rose from $4.1 trillion to $4.7 trillion between 2013 and 2014, and for all states together pensions were only 36 percent funded. All three studies showed that the majority of state pension systems continued to be seriously underfunded as of 2012 and 2013. See the section on "Pension health" below for figures comparing these statistics.

Key terms

Here are some key terms used in discussing pension funds and pension health.

1. Actuarial accrued liability (AAL): The present value of all benefits owed to current and future retirees, based on the number of retirees and the promises made regarding benefits.
2. Actuarial value of assets (AVA): The value of all the assets in the plan, which include investment gains and losses, depending on how the assets are valued.
3. Unfunded actuarial accrued liability (UAAL): The difference between the total value of assets and accrued liability; the difference between what is owed to all beneficiaries enrolled in the plan and what funds are available to pay out to both current and future beneficiaries.
4. Annual required contribution (ARC): An annual expense employers pay towards a pension plan made up of two parts: the "normal cost," or the amount paid for benefits earned in that year, and an additional cost that attempts to pay for a portion of the unfunded liabilities from previous years.
5. Funded ratio: A percentage expressing how fully a pension plan is funded, determined by dividing net assets by accrued liabilities. For example, if a plan has assets of $80 million, but liabilities of $100 million, it is 80 percent funded.
6. Rate of return: The ratio of money earned or lost on an investment expressed as a percentage of the investment. For example, a $5.00 profit on a $100 investment is a 5 percent rate of return.
7. Active member: A member of a pension plan either receiving benefits or making contributions.
8. Inactive member: A member of a pension plan no longer contributing and not yet receiving benefits from that plan.

Federal Employees Retirement System

The United States government provides federal employees with a specialized retirement plan. This plan is part of a federal system called the Federal Employees Retirement System (FERS), which applies to all employees in the legislative, executive or judicial branches of the federal government. State government employees are not eligible for participation in FERS, and instead participate in one of the numerous state pension plans discussed below.

Employees under FERS receive their benefits from three different sources: the Basic Benefit plan, Social Security and a Thrift Savings Plan (TSP). The Basic Benefit plan is a set amount paid to the retiree, regardless of how much the employee contributed. Instead, the amount paid by the Basic Benefit plan is determined by an employee's years of service and what is referred to as the high-three average. This average is calculated using the three highest-paid consecutive years of employment.

FERS members also receive benefits from Social Security. Members pay into Social Security at the same rate as private employees.

The Thrift Savings Plan (TSP) is comparable to a 401k plan. The employee contributes at least 1 percent of his pay to the plan, which is then matched by the employee's agency. These payments are invested in one of several funds, which are intended to generate additional funds for the retiree.

An employee's Social Security funds and Thrift Savings Plan can follow the employee if he leaves his federal position.

In fiscal year 2010, 87% of current civilian federal employees were enrolled in FERS, which covers employees hired since 1984. The other thirteen percent were enrolled in the Civil Service Retirement System, which is a federal system that covers only employees hired before 1984.

General information

See also: Pension data, U.S. Census

In 2013, there were 231 state-administered pension systems and 3,761 locally administered pension systems in the United States.

The table below provides general pension system information for the country.

General pension system information, 2013
State	Systems		Total members	Active members		Inactive members
	State	Local		Members	Percent of total	Members	Percent of total
United States	231	3,761	19,546,452	14,222,906	72.76%	5,323,545	27.24%
Source: United States Census Bureau

Contributions

See also: Pension contribution and payment data, U.S. Census

Pension contributions are the funds paid into pension systems. These contributions come from the employer (in the case of public pensions, the government) and employees. Investment earnings are the main source of increases in the fund and are listed separately to the right.

In fiscal year 2013, the most recent year for which information is available, total contributions of $153.8 billion were made to the country's state and local pension systems. Of this amount, $45.1 billion came from employees. The remainder came from state and local governments. The table below provides information about pension contributions in the United States in fiscal year 2013.

Pension contributions, fiscal year 2013 (dollars in thousands)
State	Total contributions from employees and employers	Employee contributions		Government contributions		Earnings on investments
		Contributions	Percentage of total	Contributions	Percentage of total
United States	$153,768,874	$45,065,430	29.31%	$108,703,444	70.69%	$383,258,490
Source: United States Census Bureau

Payments

See also: Pension contribution and payment data, U.S. Census

Payments are the amounts paid to pension recipients by their pension plans. Pension payments include benefits and withdrawals. Benefits are the regular payments made by a pension plan to the plan's recipients. Pension beneficiaries may also withdraw funds before they are due to receive regular benefits.

In fiscal year 2013, the country's state and local pension systems made payments totaling $260.8 billion. The table below provides pension payment information for the United States in fiscal year 2013. The columns labeled "Benefits," "Withdrawals" and "Other" indicate subsets of total payments. All dollar amounts displayed should be multiplied by 1,000 ($240,000 is equal to $240,000,000).

Pension payments, fiscal year 2013 (dollars in thousands)
State	Total payments	Benefits	Withdrawals	Other
United States	$260,822,329	$242,876,959	$5,513,756	$12,431,675
Source: United States Census Bureau

Cash and investment holdings

See also: Pension data, U.S. Census

Investments are a crucial part of the pension process. The goal is that, by investing pension contributions, the pensioner will receive more money when he retires than he and his employer were able to contribute. These investments can come in the form of cash investments, short-term investments, securities or other investments. Cash investments are usually low-risk, short-term investments that have a lower rate of return than other types of investments. Short-term investments are riskier than cash investments, but have the potential for greater returns. Securities can refer to stocks or bonds and represent some form of financial value. As the values of these securities change, they can be traded to make a profit. While there are other applications to securities and investments, this represents one of the most common practices.

As of fiscal year 2013, the country's state and local pension systems held nearly $3.3 trillion in total cash and investment holdings. The table below summarizes pension system cash and investment holdings for the United States. The columns labeled "Total cash and short-term investments," "Total securities" and "Total other investments" indicate subsets of the grand total. All dollar amounts displayed should be multiplied by 1,000 ($240,000 is equal to $240,000,000).

Total cash and investment holdings, fiscal year 2013 (dollars in thousands)
State	Grand total	Total cash and short-term investments	Total securities	Total other investments
United States	$3,287,364,891	$117,376,270	$2,715,310,312	$454,678,310
Source: United States Census Bureau

Pension health

See also: State unfunded public pension liabilities, 2003-2018

Pension health is a term used to describe the overall state of pension systems. It can be difficult to gauge pension health in each state, but many studies use calculations to determine the average liabilities, unfunded liabilities, funded ratio and other data. Most experts believe that pension systems need to be funded at least 80 percent to be considered healthy. This information is then used to provide a snapshot of the state's overall pension health. This section provides information from three studies regarding the health of pensions in the United States. They found the following:

• According to the Pew Center, the country paid 77 percent of its required contribution and its funded ratio was only 72 percent in fiscal year 2012.
• According to Morningstar, the country had a funded ratio of 72.4 percent in fiscal year 2012.
• According to State Budget Solutions, which assumed a lower rate of return, the country had a per capita pension debt of $15,052 and a funded ratio of 29 percent in fiscal year 2013.

Pew research

See also:Pew Charitable Trusts pensions study, 2014

According to a 2014 report by the Pew Research Center, “many states are seeing their pension debt continue to increase, despite reform efforts, because of missed contributions and the continued impact of investment losses.” The funding gap between what state pension systems have promised in benefits (liabilities) and current funding (assets) increased by $158 billion from 2010 to 2012 (14 percent), leaving state-run retirement systems with $915 billion in unfunded liabilities. Only 15 states made at least 95 percent of the annual required contributions (ARCs) for their pensions between 2010 and 2012; the aggregate shortfall in funding for all state plans was $21 billion. Data on these state pensions come from the Comprehensive Annual Financial Reports (CAFRs) that each state’s pension plan prepared for fiscal year 2012; these reports include actuarial valuations based on “the expected rate of return on investments and estimates of employee life spans, retirement ages, salary growth, retention rates, and other demographic characteristics.”

All dollar amounts displayed should be multiplied by 1,000,000 (e.g., $240,000 is equal to $240,000,000,000).

Pension health metrics from the Pew Charitable Trusts report, 2010-2012 (dollars in millions)
State	2012			Funded ratio			Percent of ARC paid
	Liability	Unfunded	ARC	2010	2011	2012	2010	2011	2012
Totals in the U.S.	$3,298,643	$914,653	$87,213	75%1	74%1	72%1	78%1	77%1	77%1
Source: The Pew Charitable Trusts, "The Fiscal Health of State Pension Plans: Funding Gap Continues to Grow" 1 indicates that the number represents an average, rather than total.

Morningstar report

See also: Pension data, 2013 Morningstar report

In 2013, independent investment research firm Morningstar released "The State of State Pension Plans 2013," a report detailing various metrics of pension system health in all 50 states. Morningstar found a $1.2 trillion gap in 2012 for the largest 100 U.S. public pension plans (according to the actuarial firm Milliman). Based on two key drivers in Morningstar’s analysis—the funded ratio and the unfunded actuarial accrued liability (UAAL) per capita—the fiscal solvency and management of these plans varied greatly. Overall, the firm found that "more than half of all states fall below Morningstar’s fiscally sound threshold of a 70% funded ratio" and all state plans combined were "72.6 percent funded with a UAAL per capita of roughly $2,600.”

According to Morningstar's research, the United States pension systems were funded at an average rate of 72.4 percent in fiscal year 2012. The table below provides state pension system health metrics for the United States in fiscal year 2012. Figures in the columns labeled "Assets," "AAL," and "UAAL" are rendered in thousands of dollars (for example, $2,400,000 translates to $2,400,000,000). Figures in the remaining columns have not been abbreviated. To view the full report, click here.

Pension health metrics, fiscal year 2012 (dollars in thousands)
State	Assets	Liabilities (AAL)	Unfunded liabilities (UAAL)	Funded ratio	Unfunded liabilities per capita
Totals in the U.S.	$2,157,578,916	$2,979,267,860	$821,688,945	72.4%1	$3,0491
Source: Morningstar, "The State of State Pension Plans 2013: A Deep Dive Into Shortfalls and Surpluses," accessed September 16, 2013 1 indicates that the number represents an average, rather than total.

State Budget Solutions report

See also: Pension data, State Budget Solutions report

State Budget Solutions is "a non-partisan, nonprofit, national public policy organization with the mission to change the way state and local governments do business." In November 2014 the organization released a research report that used a fair market valuation based on a discount rate of 2.743 percent to determine the unfunded liabilities of public pension plans. The group concluded that "state public pension plans are underfunded by $4.7 trillion, up from $4.1 trillion in 2013. Overall, the combined plans' funded status has dipped three percentage points to 36 percent. Split among all Americans, the unfunded liability is over $15,000 per person."

According to the State Budget Solutions report, the country's pension plans were funded at an average rate of 36 percent. To read the full report, click here.

Note that all dollar amounts displayed (excluding those under the "Unfunded liability per capita" column) should be multiplied by 1,000 (e.g., $240,000 is equal to $240,000,000).

Pension health metrics from the State Budget Solutions report, fiscal year 2013 (dollars in thousands)
State	Assets	Market liability*	Funding ratio	Unfunded liability	Unfunded liability per capita	Unfunded liability as % of 2013 gross state product
Totals in the U.S.	$2,679,831,466	$7,416,319,293	36%1	$4,736,487,827	$15,0521	29%1
Source: State Budget Solutions: Promises Made, Promises Broken 2014: Unfunded Liabilities Hit $4.7 Trillion 1 indicates that the number represents an average, rather than total

Other factors

Rate of return

According to a 2012 analysis by the Pew Center for the States, most state pension plans assumed an 8 percent rate of return on investments at that time. Proponents argued that an 8 percent rate of return would bear out over the long-term (15-30 years). Critics asserted that this assumption was unrealistic, citing changing market conditions and lower investment returns across the board in preceding years.

Assuming a lower rate of return to predict investment earnings increases current plan liabilities, thereby lowering the percent funded ratio and requiring increased employer contributions (ARCs). This is because future plan liabilities are discounted based on the rate of return, so smaller expected investment returns result in larger actuarially accrued liabilities. For example, on September 21, 2012, the Illinois Teachers Retirement System voted to lower its rate of return from 8.5 percent to 8.0 percent. This change increased the state's fiscal year 2014 ARC from $3.07 billion to $3.36 billion. Similarly, when California's CalPERS reduced its projected annual rate of return from 7.75 percent to 7.5 percent in March 2012, it cost the state an additional $303 million for fiscal year 2013.

Financial crisis

In the wake of the 2008 recession, proponents of a lower assumed rate of return argued that the standard 8 percent assumptions could cause pension fund managers to engage in more risky investments and imprudent stewardship of public funds. Jeffrey Friedman, a senior market strategist at MF Global, said, "To target 8 percent means some aggressive trading. Ten-year Treasury [bonds] are yielding around 2 percent, economists say we are headed for a double-dip, and house prices aren't getting back to 2007 levels for the next decade, maybe.".

Advocates of the 8 percent return rate argued that the dip following the 2008 financial crisis did not prove that there was a long-term downward trend in investment returns. According to Chris Hoene, executive director of the California Budget Project, "The problem with [the market rate] argument is there isn’t significant evidence other than the short term blip during the economic crisis that there’s been that shift. It’s a speculative argument coming out of a very deep recession."

The National Association of State Retirement Administrators researched the median annualized rate of return for public pensions for the 1-, 3-, 5-, 10-, 20- and 25-year periods ending in 2013 and found it was 7.9 percent over the 20-year period, and exceeded 8 percent for the 1-, 3- and 25-year periods. It is important to note that the NASRA data reported the median returns, which means that median annualized returns of investment portfolios for half of the examined public pension funds failed to meet an 8 percent assumed rate of return.

Recent news

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Public pensions in the United States news feed

See also

• State public pension plans
• State budget and finance pages
• State tax policy pages
• Pension statistics
• Public pension health by state
• Public pensions

External links

• Pension Tsunami
• Pension Calculator from Public Sector Inc.
• Center for Retirement Research at Boston College, "How did state/local plans get so underfunded?"