Public pensions were unprepared for recession sparked by COVID-19, report finds
Only one in five public funds were resilient enough to weather future downturns by the end of 2019, according to the Equable Institute.
Public pensions entered the recession caused by COVID-19 in a worse position than the 2008 Great Recession despite a decade-long bull market, according to a new report released by the Equable Institute.
Only one in five public funds were resilient enough to weather future downturns by the end of 2019, according to the report, and unfunded liabilities are expected to grow to $1.62 trillion in 2020, up from $1.35 trillion in 2019. That would bring the aggregated funded ration to 67.9%, the lowest point in modern history.
The report analyzed post-Great Recession funding and policy trends while looking at the impact of COVID-19.
“For state leaders to understand the best ways to navigate their retirement system challenges in the age of COVID-19, it is critical to understand the trends for pension systems following the Great Recession,” said Anthony Randazzo, Equable’s executive director and report co-author. “There are lessons about what policies should be avoided, and what some states did to break from the pack and recover before this most recent economic downturn.”
Five states–California, Illinois, New Jersey, Texas and Pennsylvania–account for more than 50% of the nation’s unfunded public pension liabilities, according to the report. New Jersey, Kentucky and Illinois also have the largest unfunded liabilities relative to their state GDP, topping out at 15%.
Half of plans that were at least 90% funded at the end of 2019 dropped to 60%-90% funded due to COVID-19, according to the report. Another 12 plans moved from “fragile,” or 60%-90% funded, to “distressed,” or less than 60% funded.
The report noted that contribution rates are increasing, but benefits payments are also growing as more people retire, resulting in a $113 billion negative cash flow for 2019. That will make it difficult for plans to invest their way back to health going forward.
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