Concerns over the long-term financial health of public pension systems across the United States are intensifying, as aggregate unfunded liabilities continue to total trillions of dollars. A recent social media post by user Kumar starkly highlighted these issues, stating, "Public pensions are destroying your people," and urging a focus on this "elephant in the room" over other societal worries.
Unfunded liabilities represent the shortfall between promised future benefits to public employees and the assets currently held by pension funds, plus projected investment returns. According to a July 2024 report from Moody's Ratings, unfunded liabilities for U.S. state and local pension plans stood at approximately $2.5 trillion as of June 30, 2024, a significant decrease from $6 trillion in 2020 but still a substantial fiscal challenge. Other estimates, such as one from the American Legislative Exchange Council (ALEC) in 2023, placed the nationwide total even higher, at $6.96 trillion.
This persistent gap is attributed to several factors, including overly optimistic investment return assumptions and insufficient contributions from state and local governments. While the average assumed rate of return for public pensions was 6.88% in 2023, actual returns often fall short, exacerbating the funding deficit. When pension funds are underfunded, it can place considerable strain on state and local budgets, potentially diverting funds from other critical public services like education and infrastructure.
The financial health of public pension systems varies significantly by state. As of late 2023, states such as Illinois, New Jersey, California, and Texas carried the highest levels of unfunded liabilities in dollar value. Conversely, states like Washington, New York, Tennessee, and South Dakota have managed their pension systems more effectively, with some even achieving fully funded or overfunded statuses.
The sentiment expressed by Kumar in the tweet reflects a broader public debate regarding the sustainability of these systems and their potential impact on taxpayers and future generations. The ongoing challenge for policymakers involves implementing reforms, increasing contributions, and adopting more realistic financial projections to ensure the long-term solvency of these vital retirement benefits.