The State Pension Funding Gap

According to a study by the Pew Charitable Trust, the
 total unfunded pension liability for Illinois accounts for 10%
of the unfunded pension liabilities of the entire country.

The gap between the total assets reported by state pension systems across the United States and the benefits promised to workers, now reported as the net pension liability, reached $1.1 trillion in fiscal year 2015, the most recent year for which complete data are available. That represents an increase of $157 billion, or 17 percent, from 2014.

A state pension plan’s annual funded ratio gives an end-of-fiscal-year snapshot of the assets as a proportion of its accrued liabilities. In aggregate, the funded ratio of these plans dropped to 72 percent in 2015, down from 75 percent in 2014. Investment returns that fell short of expectations proved to be the largest contributor to the worsening fiscal position, with median overall returns of 3.6 percent.1 On average, state pension plans had assumed a long-run investment return of twice that—7.6 percent—for fiscal 2015.

Though final data for 2016 are not yet available, low returns will also be reflected there. Based on returns averaging 1.0 percent for that year, the net pension liability is expected to increase by close to $200 billion and reach about $1.3 trillion. Market volatility will also have a significant impact on cost predictability in the near and long terms.

Expected increases in the nationwide funding gap of more than $350 billion over two years—primarily because of lower-than-forecast investment returns—will require policymakers in many states to choose from often difficult options: paying more into state pension plans and potentially crowding out other spending in their budgets, or letting funding levels drop and pushing costs into the future. Read more by the Pew Charitable Trust.