Report: State and local pension plans have $1.48 trillion in debt

Public pension systems in the United States saw a decrease in unfunded liabilities in 2024, dropping from $1.62 trillion to $1.48 trillion, a 9% decrease, Reason Foundation’s 2025 Pension Solvency and Performance Report finds. This was primarily driven by the higher-than-expected investment returns in the 2024 fiscal year.

State pension plans continue to carry the majority of the nation’s public pension debt, holding $1.29 trillion in unfunded liabilities, compared to local governments’ $187 billion in debt, Reason Foundation finds.

The median funded ratio of this report’s sample of pension plans stood at 78% at the end of 2024, a 3% increase from last year. This indicates that, while public pension funding has improved over the previous year, governments have still saved only 78 cents of every dollar needed to provide promised retirement benefits.

Reason Foundation’s stress tests also suggest that public pensions remain vulnerable to market downturns. A single economic recession could significantly increase their unfunded accrued liabilities, potentially raising the state and local total of public pension debt to as much as $2.74 trillion by 2026.

The Pension Solvency and Performance Report provides a comprehensive overview of the current and future status of state and local public pension funds. As the nation navigates another year marked by significant economic fluctuations and demographic shifts, this report assesses the resilience and adaptability of U.S. public pension systems. This analysis ranks, aggregates, and contrasts public pension plans based on their funding, investment outcomes, actuarial assumptions, and other indicators.

In addition to 24 years of historical data, the 2025 edition of Reason Foundation’s Pension Solvency and Performance Report includes financial and actuarial data from the pension plans’ 2024 fiscal year, the most recent year for which most government pension plans have reported data.

This edition of the report ranks public pension systems from best to worst across five core dimensions: funded status, investment performance, contribution rate adequacy, asset allocation risk, and probability of meeting assumed returns. Together, these measures reveal which states have positioned their public pension systems for long-term stability and which remain vulnerable to rising costs, market volatility, and political shortfalls in funding discipline.

Unfunded public pension liabilities

In recent decades, public pension systems in the U.S. have seen a significant increase in unfunded liabilities, particularly during the Great Recession. Between 2007 and 2010, unfunded public pension liabilities grew by over $1.15 trillion—an 809% increase—reflecting the financial challenges faced during that period. Despite some improvements in funding ratios over the last decade, these pension liabilities have continued to rise, underscoring ongoing financial pressures on state and local governments and taxpayers.

As of the end of the 2024 fiscal year for each public pension system, total unfunded public pension liabilities (UAL) reached $1.48 trillion, with state pension plans carrying the majority of the debt.

Nationwide, the median funded ratio of public pension plans stood at 78% at the end of 2024. Still, stress tests suggest that another economic downturn could significantly increase unfunded liabilities, potentially raising the total to $2.74 trillion by 2026.

Funded ratios of public pensions

The funded ratio of public pensions, which indicates the percentage of promised benefits that are currently funded, has experienced considerable fluctuations. After returning to 96% funded in 2007, the funded ratio of U.S. public pension systems fell to 64% during the Great Recession. Although funded ratios have recovered somewhat, they remain susceptible to market downturns.

A stress test scenario for 2026, assessing the impact of a 20% market downturn, indicates that the average funding level of public pension plans could fall to 63%. This could lead to critical underfunding for many pension plans, raising concerns about their ability to fulfill future obligations.

Changes in investment strategies

Over the past two decades, investment strategies of public pension funds have shifted notably. Allocations to traditional asset classes, like public equities and fixed income, have decreased while investments in alternative assets, such as private equity, real estate, and hedge funds, have increased. This shift reflects a strategic move for pension systems trying to achieve higher investment returns in a challenging market environment.

By the end of the 2024 fiscal year for each pension system, public pension funds managed approximately $5.49 trillion in assets, with a significant portion now invested in alternative assets, such as private equity/credit, and hedge funds. While these alternative investments may offer the potential for higher returns, they also introduce greater complexity and risk.

Investment performance

Public pension funds have faced challenges meeting their assumed rates of return (ARRs). Over the past 24 years, the national average annual rate of investment returns of pension systems has been 6.62%—still below what the plans had assumed. The average assumed rate of return for public pensions has been gradually reduced from 8.02% in 2001 to 6.87% in 2024.

Failing to meet their overly optimistic assumed rates of return has contributed to a significant increase in unfunded liabilities, requiring additional pension contributions from state and local governments, i.e., taxpayers, to maintain funding levels.

Investment returns themselves have varied widely, with public pension plans posting very strong gains in 2021 (25.4% returns), in contrast to large losses in 2009 (-12.9% returns on average) and further losses in 2022 (-5.1%). This volatility between expected rates of return and actual investment returns has created budgetary challenges for governments and taxpayers.

Employer contributions and cash flow

Employer contributions continue to dominate pension funding, while employee rates remain stable. In 2024, the total contribution rate was 28.8% of payroll, with employers covering 21.6% and debt amortization alone consuming 15.7%. More than half of all contributions—54%—went to paying down past pension debt rather than funding new benefits.

Net cash flows improved modestly, narrowing to -1.7% of assets, but systems remain reliant on strong investment returns to cover ongoing benefit payments.

Conclusion

Despite a year of substantial market gains and improved funding ratios, systemic risks remain for public pension systems. Far too many pension plans continue to rely on optimistic return assumptions, volatile markets, and a heavy reliance on taxpayer contributions to manage their legacy debt. Without sustained public pension reforms and more disciplined funding policies, today’s limited progress could quickly reverse.

This report was produced by Reason Foundation’s Pension Integrity Project, an initiative to conduct research and provide consulting and insight about the public pension challenges our nation grapples with.

Webinar

To dive deeper into the findings, watch our pre-recorded webinar below, where Reason Foundation’s Pension Integrity Project team details the report’s findings, explains key trends, and unpacks what these results mean for state and local governments, public employees, and taxpayers.

Related:

Study: Illinois, Connecticut, Alaska, Hawaii, New Jersey and Mississippi have the most per capita pension debt

The public pension plans with the most debt, worst investment returns of the year

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Source: https://reason.org/policy-study/annual-pension-report/