The Sustainability of State & Local Pensions: A Public Finance Approach

Louise Sheiner

Issues in Brief from Center for Retirement Research

Abstract: State and local government pension plans are important economic institutions in the United States. They hold nearly $5 trillion in assets; their annual payments to beneficiaries are equal to about 1.5 percent of national GDP; and over 11 million beneficiaries rely on these payments to support themselves in retirement. In recent years, attention has focused on the plans’ large unfunded liabilities and the need to fully fund these obligations. But is full funding the only way to achieve fiscal sustainability? This brief, which is based on a recent paper, explores an alternative path to the fiscal sustainability of state and local pension plans – namely, stabilizing their pension debt as a share of the economy.1 To assess the feasibility of this approach requires: 1) projecting the annual cash flows for a nationally-representative sample of 40 state and local pension systems to see the future evolution of each plan under current contribution levels; and 2) estimating the contribution increases needed to stabilize the ratio of pension debt to the economy. The discussion proceeds as follows. The first section provides background on the fiscal stability of state and local plans. The second section describes the data and methodology. The third section presents the results for when plans will exhaust their assets under current funding levels and benefit provisions. A key finding is that pension benefits, as a share of the economy, are currently near their peak and will decline significantly over time due to the reforms instituted by many plans. Nevertheless, many plans are at risk over the long term of exhausting their assets, so action will be needed. The fourth section presents the results on the alternative path, specifically the contribution changes required to stabilize pension debt, both in the long run and to get the ratio at the end of 30 years back to today’s level. The final section concludes that the United States is not facing a state and local pension crisis but, over the longer term, a large share of plans face the risk of insolvency. Hence, they would need to increase contributions to achieve sustainability. But the required adjustments to stabilize debt relative to the economy are generally moderate in size and, in all cases, substantially lower than the adjustments required under the typical full prefunding framework.

Pages: 12 pages
Date: 2023-04
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