Many state and local pension systems are facing funding crises. Through a synthesis of multidisciplinary research and stakeholder discussions, the report examines the origins and consequences of pension crises. There is not a single national pension crisis but many small crises reflecting local circumstance, history, and constraints, including legacy pension costs. This report identifies insights for informing a tailored road map for reform.

Causes and Consequences of the Crises in State and Local Pension Funding

Research to Inform the Development of a Road Map for Reform

David Knapp, Beth J. Asch, Philip Armour, Zhan Okuda-Lim

ResearchPublished Jun 30, 2023

Many state and local pension systems are facing funding crises. The average U.S. public pension plan cannot cover a quarter of its obligations to provide pension benefits to current, retired, and former employees, and 17 systems are unable to cover more than half of their obligations.

Using a comprehensive approach based on a synthesis of multidisciplinary research and discussions with stakeholders, the authors examine the recent history of pension finance, possible consequences for sponsoring government finances and services, reforms to pension financing and benefits aimed at shoring up system's funding, and characteristics of local institutions and politics that limit reforms.

An overarching finding is that there is not a single national pension crisis. There are many small crises that reflect local circumstance, history, and constraints, including legacy pension costs. The authors identify a set of key insights for informing a tailored road map for reform that meets the objectives of its stakeholders.

Key Takeaways

Pension crises are multifaceted

  • State and local governments with underfunded pension systems often exhibit an array of budget, workforce, and public service issues that complicate addressing the funding crisis.

Causes of pension crises are complex

  • There are six common contributors to pension crises: incorrect actuarial assumptions, institutional constraints, poor governance, lack of expertise among stakeholders and decisionmakers, adversarial political culture, and conflicting incentives and interests.

Goals of pension reform include both short- and long-term objectives

  • The goals of the reform typically involve ensuring one or more of the following: sufficient funds for new and legacy benefit obligations, quality public services and a quality workforce, employee retirement security, effective governance structure, and accurate and reasonable actuarial assumptions.
  • Reforms in the past decade have prioritized funding obligations.

Reforms can take multiple paths

  • Possible reforms include changes to contributions, benefits, actuarial assumptions, and the governance structure, as well as addressing conflicts of interests.
  • Between 2009 and 2021, nearly all systems increased their pension system contributions, and the majority reduced benefits for new or current employees. More rarely, states have introduced alternative pension designs (e.g., defined contribution).
  • Research is lacking on the frequency of reforms beyond contribution and benefit reform and the effectiveness of reforms at reducing pension underfunding.

Implementation is an ongoing process and requires a knowledgeable navigator

  • A recurring theme in stakeholder discussions was that pension reform came after a person or group in the government adopted the issue, became informed, and went out to communicate the challenges created by underfunding.

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Knapp, David, Beth J. Asch, Philip Armour, and Zhan Okuda-Lim, Causes and Consequences of the Crises in State and Local Pension Funding: Research to Inform the Development of a Road Map for Reform. Santa Monica, CA: RAND Corporation, 2023. https://www.rand.org/pubs/research_reports/RRA2307-1.html.
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Funding for this project was provided by Chris Varelas, a member of the RAND Center for Global Risk and Security Advisory Board. This research was conducted by the RAND Center for Global Risk and Security within International Programs at the RAND Corporation.

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