Public pension funding by state ranges from over 100% in the healthiest systems down to roughly 52% in the most strained, with a combined national shortfall of about $1.32 trillion as of 2023.1The Pew Charitable Trusts. State Pension Funding Levels Stayed Stable Despite Volatility The national funded ratio sat at 74% in 2023, with early estimates pointing to improvement into the upper 70s or low 80s in the years since. Where your state falls on that spectrum affects its credit rating, its borrowing costs, and how much room the budget has for schools, roads, and everything else.
What the Funded Ratio Actually Tells You
The funded ratio compares a pension plan’s assets to its accrued liability, which is the present value of benefits already earned by current workers and retirees. A plan at 100% has a dollar in the trust for every dollar promised. A plan at 60% has sixty cents, and the missing forty has to come from somewhere: future taxpayers, higher employer contributions, or investment returns that beat expectations.
Actuaries build the liability using assumptions about life expectancy, future salaries, and investment returns. The asset side counts cash, stocks, bonds, and other holdings in the trust. The difference between the two is the unfunded liability.2Government Finance Officers Association. The Role of the Actuarial Valuation Report in Plan Funding
A common misreading treats 80% as a healthy score. The American Academy of Actuaries has called this the “80% pension funding myth,” pointing out that actuarial funding methods are designed to reach 100%. Anything less is a debt being carried.3American Academy of Actuaries. The 80 Percent Pension Funding Myth Direction matters too. A plan at 85% and climbing is in a different position than one at 85% and sliding.
Best-Funded State Pension Systems
A handful of states run pension systems that are essentially fully funded. Tennessee sits at roughly 104%, Washington at 103%, and South Dakota at 100%. South Dakota’s system has been at or above 100% funded in 29 of its last 34 annual valuations.4South Dakota Legislature. South Dakota Retirement System Fiscal Year 2024 Report on Funded Status Wisconsin also reported 100% funding on a smoothed-asset basis as of December 2024.5Wisconsin Department of Employee Trust Funds. ETF Releases 2024 WRS Financial Report
These states have one thing in common: they pay the full actuarially required contribution every year, including during recessions. Wisconsin adds a structural feature almost no other state has. Benefits can be adjusted downward after poor investment years, which prevents shortfalls from compounding into permanent debt.
Worst-Funded State Pension Systems
At the other end of the rankings, Illinois sits near 52%, Kentucky at 54%, and New Jersey at 55%. Illinois alone carries approximately $144 billion in unfunded liabilities across its five state-level systems as of mid-2024.6Illinois General Assembly. Special Pension Briefing The story in all three states is similar: decades of skipping or shorting the annual contribution let interest compound on the unpaid balance, and the hole grew faster than any budget could catch up.
Where the Big States Land
Funding levels across the five most populous states span most of the national range.
- New York: 94%
- Florida: 82%
- California: 82%
- Texas: 80%
- Pennsylvania: 66%
The median funded ratio across state systems for fiscal year 2024 stood at about 78%.4South Dakota Legislature. South Dakota Retirement System Fiscal Year 2024 Report on Funded Status
Why Some States Are in Better Shape
Three factors explain most of the variation.
Whether the Employer Pays What It Owes
The actuarially determined contribution, or ADC, is the annual payment needed to cover benefits earned that year plus a portion of any existing shortfall.2Government Finance Officers Association. The Role of the Actuarial Valuation Report in Plan Funding Pay the full ADC every year and the gap holds steady or shrinks. Pay less and interest compounds on the unpaid balance. Almost every state near the bottom of the rankings has a long history of paying less than the ADC. Employees contribute too, typically between 3% and 11% of payroll, but employee rates alone never determine whether a system is well-funded.
What the Investments Do
Pension funds assume a long-term rate of return, and that assumption sets the contribution schedule. The national average assumed return has drifted down to about 6.9%, reflecting recognition that the 8%-plus assumptions common a decade ago were unrealistic. When actual returns fall short, new unfunded liability appears that has to be paid off through higher future contributions. Many funds have shifted toward alternative assets like private equity and private debt, chasing higher returns while accepting harder-to-value holdings and more volatility in reported funding levels.
How Generous the Benefits Are
Cost-of-living adjustments are the single biggest driver on the liability side. A guaranteed 3% annual increase to every retiree’s check compounds over decades of retirement. Some of the worst-funded states locked in generous automatic COLAs during flush years without dedicating revenue to cover them long-term. Vesting rules and benefit formulas matter, but COLAs are what keep liabilities growing even when no new benefits are being earned.
What Underfunding Costs Residents
Credit rating agencies treat unfunded pension liabilities as a form of long-term debt.7National Association of State Retirement Administrators. Credit Effects A large shortfall drags down a state’s credit rating and raises interest rates on bonds issued for roads, schools, and other infrastructure. The extra interest produces no public benefit. It just covers the cost of past underfunding, and it makes the next round of pension contributions that much harder to afford.
Pension costs also crowd out other spending. State and local government pension contributions more than doubled as a share of total expenditures between 2000 and 2019, rising from 2.7% to 5.7%. Measured against tax revenue, they jumped from 4.3% to 9.0% over the same period.8Urban Institute. Addressing and Avoiding Severe Fiscal Stress in Public Pension Plans When the pension bill grows, legislators can raise taxes, cut services, or push the shortfall further into the future. Residents in the highest-debt states end up paying twice: current taxes for current services, plus a growing hidden tab for promises made decades ago.
Why Fixing an Underfunded System Is Slow
Earned pension benefits are legally protected in most states. The U.S. Constitution’s Contracts Clause prohibits states from passing laws that impair existing contracts, and courts generally treat pension benefits as contractual obligations.9Cornell Law School. Contract Clause – U.S. Constitution Annotated When cuts are challenged, courts apply a three-part test that sets a high bar, and courts in many states have struck down reductions even when the system was in serious distress.10Center for Retirement Research at Boston College. Legal Constraints on Changes in State and Local Pensions In practice, benefits already earned by current employees or retirees are off limits in most states. Reform has to be forward-looking.
How States Are Closing the Gap
- New benefit tiers for future hires. The most common approach creates a less generous structure for employees hired after a certain date, using a lower multiplier, a higher retirement age, or reduced COLAs. Savings take decades to fully appear because existing workers stay under the old rules, but it caps how fast liabilities grow.
- Hybrid and defined contribution plans. Some states have moved new employees into hybrid arrangements combining a smaller pension with a 401(k)-style account. This shifts some investment risk from the state to the employee.
- Paying the full ADC. The most straightforward fix is simply paying what the actuaries say each year. States that have committed to it have generally seen their funded ratios stabilize or improve. It costs money upfront but avoids the compounding problem that makes deferred contributions so expensive.
- Pension obligation bonds. Some governments have borrowed by issuing taxable bonds and investing the proceeds, betting returns will beat the interest rate on the debt. The Government Finance Officers Association has recommended against the practice, calling it a leveraged market bet. When markets cooperate, it helps. When they don’t, the government owes bond payments on top of its pension bill.11The Pew Charitable Trusts. Government Borrowing to Lower Pension Costs Carries Risks
No single reform fixes an underfunded system overnight. States that have made real progress tend to combine several of these while paying the full ADC every year regardless of the budget cycle.
Retiree Health Coverage Is a Separate Liability
Pension funding gets most of the attention, but many states also promise retiree health insurance, known as Other Post-Employment Benefits. As of fiscal year 2022, unfunded OPEB liabilities for the largest state and local governments reached $789 billion, alongside $753 billion in unfunded pension liabilities for those same entities. OPEB benefits receive weaker legal protections in most states than pensions, so governments have more flexibility to adjust coverage, which some have used to shift retirees to Medicare Advantage or raise premium shares. A state’s pension funded ratio does not, on its own, capture the full retirement-related debt on the books.