State pension funds across the U.S. reported a cumulative deficit of $1.4 trillion at the end of 2016, representing a $295 billion increase from the year before, according to a Pew Charitable Trusts report.
This marks the 15th yearly increase in the pension deficit since 2000, the report said. State plans disclosed assets of $2.6 trillion to cover total pension liabilities of $4 trillion. Only four states — New York, South Dakota, Tennessee and Wisconsin — were at least 90% funded in 2016, according to the report.
The report cited investment returns falling short of state assumptions as a major factor leading to the funding gap increase. The median public pension plan's investments returned about 1% in 2016, far below the median assumption of 7.5%. The disparity added about $146 billion to the deficit. Assumption changes primarily coming from states lowering the assumed rate of return used to calculate pension costs also accounted for another $138 billion in increased liabilities, according to Pew.
However, the report points out that even if plan assumptions had been met in 2016, the funding gap would have still increased by $13 billion because states did not contribute enough to their systems. They would have needed to contribute at least $109 billion to pay for both the cost of new benefits and paying down unfunded liabilities.
"There is no one-size-fits-all solution to the pension funding shortfall and the budgetary challenges facing individual states," the report said. "But without new policies that commit states to fully funding retirement systems, the impact on other essential services — and the potential for unpaid pension promises — will increase."
So far, data accumulated from 2017 suggests that strong investment returns from market gains will decrease reported unfunded liabilities. But Pew cautions that the same market volatility providing strong returns could have an adverse impact in the long term — especially if states continue to fail to make adequate annual contributions to their plans.
The full report is available on Pew's website.