Public pension systems across the United States have reached their strongest funding levels in nearly two decades, according to new data from the Equable Institute and Federal Reserve. The national funded ratio—a measure of how much money pension plans have set aside relative to promised benefits—is projected to reach 85.0% in fiscal year 2026, up 3.9 percentage points from 81.2% in 2025. This marks the fourth consecutive year of improvement and represents the best position these plans have occupied since 2009, before the financial crisis dealt a devastating blow to retirement security nationwide. The gains extend across multiple dimensions of pension health.
Total unfunded liabilities fell to an estimated $1.13 trillion, down from $1.37 trillion in 2025—a $240 billion improvement in just one year. Meanwhile, combined assets in state and local defined-benefit plans reached a record $6.85 trillion as of the fourth quarter of 2025, reflecting 11.1% growth from the prior year. These improvements are not limited to a handful of fortunate states. Forty-five states improved their funded status from 2025 to 2026, and seven states now maintain 100% or better funded ratios, meaning they have fully set aside the money needed to pay all promised benefits.
Table of Contents
- How Rising Investment Returns and Contributions Are Strengthening State Pension Systems
- The Uneven Landscape: Which States Have Secured Retirement and Which Remain at Risk
- The Reform Strategies States Are Using to Accelerate the Path to Full Funding
- What Improving Pension Funding Means for Retirees, Current Employees, and Employers
- The Remaining Funding Gap and Risks That Could Reverse Progress
- How Investment Returns Above Target Are Covering a Growing Portion of Pension Obligations
- The Legacy of the 2008-2009 Crisis and the Ongoing Recovery
How Rising Investment Returns and Contributions Are Strengthening State Pension Systems
The dramatic improvement in pension funding reflects three powerful forces working simultaneously: stronger-than-expected investment performance, record employer contributions, and a growing asset base. Large U.S. public pension plans are projected to earn an average return of 9.4% this year, exceeding their assumed actuarial target of 6.9% for the fourth consecutive year. When pension funds beat their investment return assumptions, that surplus directly reduces the gap between promised benefits and available resources.
Employers have stepped up commitments to bridge remaining shortfalls. Public employers now contribute an average of 31.83 cents for every dollar of employee payroll dedicated to pensions—more than triple the contribution rate from 2001. For a police officer or teacher earning $60,000 annually, that means employers are setting aside nearly $19,000 per year into the pension fund. State and local governments distributed over $400 billion in pension benefits to retirees and beneficiaries in the most recent year, and employer contributions now represent 5.16% of all direct general spending by state and local governments. This represents a substantial reallocation of resources toward retirement security, though it also means less money available for schools, roads, and other services.
The Uneven Landscape: Which States Have Secured Retirement and Which Remain at Risk
While national trends are encouraging, the reality varies sharply by state. Tennessee leads the nation with a 104% funded ratio, meaning its pension fund holds $1.04 for every $1.00 of promised benefits. Washington (103%) and South Dakota (100%) join Tennessee in the fully funded category, alongside four other states. This tier of states has either maintained disciplined contribution schedules, benefited from strong investment performance on concentrated portfolios, or implemented benefits reforms that slowed future liability growth.
A second group of states has climbed into the 90%+ range: Florida improved to 91.8%, Minnesota to 91.5%, Georgia to 93.5%, and Oklahoma to 94.8%. These mid-tier performers demonstrate that sustained focus on both contributions and investment returns can move a pension system from the “distressed” category toward sustainability within a decade. However, a persistent gap remains. New Jersey and Illinois continue to operate with funded ratios below 60%—56.7% and 56.4%, respectively—meaning these states have set aside only about half the money needed to pay promised benefits. For New Jersey teachers or Illinois state employees, this funding gap creates genuine uncertainty about the long-term security of retirement promises made by their employers.
The Reform Strategies States Are Using to Accelerate the Path to Full Funding
Progressive states are moving beyond contribution increases and are implementing structural reforms to improve sustainability. Hawaii has taken an aggressive approach, reducing the maximum amortization period for unfunded liabilities from 30 years to 20 years by fiscal year 2029. The state estimates this accelerated paydown will save $50 billion over two decades. Shortening an amortization period sounds technical, but the practical effect is significant: Hawaii is committing to fully eliminate its unfunded liabilities within the working lifetime of current employees rather than pushing obligations onto future generations.
A broader trend emerging across multiple states involves raising the minimum retirement eligibility age. Several states have implemented or are advancing reforms that raise the minimum retirement age from 60 to 62 or even 65. These changes apply primarily to new employees and future service accruals, not to workers already within ten years of their planned retirement. The intended effect is to slow pension fund outflow by extending the average working life and allowing more years for contributions and investment growth to accumulate. For a 45-year-old worker halfway through a 30-year career, an increase in retirement age from 60 to 62 might delay retirement by two years, meaning two additional years of contributions to the pension system.
What Improving Pension Funding Means for Retirees, Current Employees, and Employers
Retirees and current employees benefit most directly from improved pension funding. As funded ratios rise, the risk of benefit reductions or delayed payments diminishes. In severely underfunded systems, there is a genuine possibility that future legislatures will be forced to modify promises made to workers—either by reducing cost-of-living adjustments, capping benefits, or restructuring the system entirely. Tennessee’s 104% funding level essentially eliminates this risk for current and future beneficiaries. By contrast, current Illinois workers face ongoing uncertainty about whether promised benefits will be paid in full or whether structural changes may be imposed.
Employers face a more complex tradeoff. Higher employer contributions mean reduced flexibility for budgeting in other areas. A city that dedicates 31.83 cents of every payroll dollar to pensions has less to spend on filling potholes, staffing libraries, or updating water systems. However, avoiding contributions in the short term only increases the bill later—unfunded liabilities compound like debt, requiring far larger contributions or benefit cuts down the line. Public employers that underfunded pensions during the 2000s are now paying the price with contribution rates that have tripled.
The Remaining Funding Gap and Risks That Could Reverse Progress
Despite impressive improvements, the national pension system still carries a $1.13 trillion funding gap. To put this in perspective, it represents approximately 16 weeks of all federal government spending. This gap won’t disappear through good luck; it requires continued employer contributions, sustained investment performance, or benefit adjustments. If markets experience a significant downturn similar to 2008-2009, pension plans would feel an immediate impact. During that crisis, the national funded ratio plummeted to below 70%, requiring years of recovery and contributing to the higher contribution rates we see today.
The concentration of underfunding in a few large states creates additional risk. New Jersey and Illinois together account for a disproportionate share of unfunded liabilities. If either state experiences an economic downturn that reduces tax revenues or asset values, it could trigger a cascade of difficult choices. Both states have relatively older workforces and higher benefit structures than many others, meaning the ratio of retirees to active workers is less favorable. This demographic profile makes these systems more sensitive to market downturns and less able to recover quickly through future contributions.
How Investment Returns Above Target Are Covering a Growing Portion of Pension Obligations
The fact that pension plans are consistently beating their actuarial return assumptions deserves close attention, as it reveals both opportunity and risk. When a pension plan assumes a 6.9% return but earns 9.4%, that 2.5 percentage point spread translates into billions of additional dollars flowing into the system—money the employer wasn’t expecting to contribute. This surplus is accelerating the path to full funding and reducing the burden on taxpayers.
Over time, however, relying on returns above target creates vulnerability. Assumptions of 6.9% returns are deliberately conservative, designed to provide a margin of safety. If investment returns normalize to the assumed level, or fall below it, the improvement in funded ratios would slow or reverse.
The Legacy of the 2008-2009 Crisis and the Ongoing Recovery
The improvements visible today represent a historic recovery from one of the deepest crises to hit public pensions in modern history. The 2008-2009 financial crisis wiped trillions from pension fund assets and left most state systems underfunded for years. States that might have otherwise reduced contributions instead had to increase them dramatically to stay on a path toward recovery.
The discipline required to maintain aggressive contribution schedules through the weak economic years of 2010-2015, despite budget pressures and political resistance, positioned states to benefit fully from the market recovery that followed. Some states gave up on that discipline and cut contributions early; they are still catching up. Tennessee, Washington, and the other well-funded states demonstrated that long-term commitment to the fundamentals of pension funding—consistent contributions, realistic return assumptions, and sometimes structural benefits reforms—produces measurable results over decades.
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