“What is the state of pensions in 2022?
State pension systems in the United States still existFragility.
It is an annual report on the financial situation of the state and local public pension systems, in a historical context. State and local governments face a wide range of challenges across the board, and some of the biggest are rising and unpredictable pension costs. The scale and effects of these challenges are best understood by considering decades of economic trends and funding decisions that have brought public sector pension systems to this point.
It should come as no surprise that US pension funds took a financial hit this year, reversing the following year with some of the best investment returns ever. The massive 2021 government and corporate bond yields have clearly not aligned with any kind of obvious market fundamentals that indicate a future of persistent growth. The volatility and fragility of the past few years point to the stark reality: state and local pension systems collectively will not invest to escape precarious funding. The main path forward for most pension funds with fragile or troubled funding ratios is likely to require policy changes and increases in contributions.
So, what are the trends in the financing of public pensions in 2021?
- Despite state and local plans reporting a disappointing preliminary ROI of -10.4% in 2022, there has been a negative trend in the net funding ratio over the last three years.
- The 2022 funding status for state and local pension systems is down significantly from last year, the biggest drop in a year since the Great Recession and financial crisis. Volatility in investment returns contributes to some significant fluctuations in capitalization levels, which have been exacerbated by rising inflation and geopolitical turmoil.
positive trends
- Funding Policies: There are now 84 state and local plans expecting an ROI of less than 7% from announcements through June 2022. That's more than the 65 plans expecting 7% or less from their valuations in 2020. Only 9.2% of state plans and local plans assumed returns of 7.5% or more. Many states also made one-time supplemental contributions to supplemental funds, emergency funds, and budget surpluses to make one-time contributions to state pension funds to bolster their funding levels and purchase assumed rates of return.
- Paying the bills: While some states did not fully fund their mandatory contributions in 2021, the net states collectively paid closer to the actuarially determined rates (99.8% overall) than in any year since 2001.
negative trends
- Return on Investment: Preliminary return on investment for 2022 is -10.4% on average for state and local plans, after once-in-a-century investment gains in 2021 (25.3% on average). All plans will not achieve the expected return (6.9% on average under current policy). The net result is the biggest drop in assets in a year since 2009.
- Funding Rate: Weak returns have helped reduce projected funding for state and local plans. In 2022, we expect the overall funding ratio to decline to 77.9% and total unfunded liabilities to rise to $1.4 trillion from $933 billion in 2021. This represents a loss of roughly half of last year's improvement. Within states, the proportions funded and the levels of unfunded liabilities continue to vary significantly from state to state. The vast majority have a Fragile or Vulnerable funding status.
- Asset Allocations: Asset allocations continue to shift toward riskier alternatives, including private equity, hedge funds, and real estate pension funds trying to invest to get out of their funding gaps. The share allocated to hedge fund managers and private equity strategies increased to 14.9% (from 8% in 2008).
- Impact of inflation: Public pensioners may be more exposed to inflation than many realize, given the limited cost-of-living adjustment provisions available nationwide. 168 plans in our database do not offer or guarantee a COLA to retirees. For plans that offer inflation protection, the average COLA is 1.58% in 2022, significantly lower than the estimated inflation rate of 8.6% (CPI May 2022) nationally.
- Contribution rates: The negative trends of the last decade continue to persist for contribution rates for members of government and employers.
- Cash Flow: As evidenced in the first half of 2022, it will become increasingly difficult to earn returns on large investments in the future. This will put a lot of pressure on government pension plans with negative cash flow due to increased benefit payments.
The impact of the ongoing global conflict
Before Russia invaded Ukraine in March 2022, state and local pension funds had $5.7 billion in assets, securities, real estate, and other financial interests invested directly in the Russian or Belarusian markets.
Russian asset divestment efforts have been formally adopted in 23 states, including:
- 24pension systems boards or state investment boards that have voluntarily voted to divest.
- 3state treasurers or auditors who ordered the divestment as sole trustees.
- 6state legislatures that passed laws mandating the divestment of all state pension funds;
The main effect of the war between Russia and Ukraine was to put downward pressure on financial markets in general.
National Trends
State and local pension plans have reached historic levels of investment in private equity and real estate, doubling down on what has become a high-risk, high-reward dilemma for managers.
This paid off in 2021, but caused a lot of pain in 2022. In an era of volatile financial markets, the pension fund is all about risk exposure and mitigation.
Asset allocations have shifted from relatively safe fixed income investments to riskier categories in search of stronger investment returns.
Notably, private equity investments now make up more than 10% of portfolios, or at least they were at the end of 2021, before valuations collapsed in the last six months.
Average investment returns have been consistently lower than assumed rates of return for most of the past decade. This has contributed to the increase in unfunded liabilities for public projects.
We estimate that 2022 returns will average 10.4% (for plans through June), which will be the first time since 2009 that state and local plans have averaged negative. Combining 2021 and 2022, the ten-year average return is 7.5%, thankfully still above the hypothetical average return (6.9%).
Fortunately, since 2019, the 10-year average yield has remained above assumed returns and this has helped stabilize funding levels.
The total cost ratio for state and local plans collectively lost about half of their gains since 2021.This is the largest decline in the one-year funding rate since the Great Depression.
The reason for the change in funding in the last three years is also the most volatile period since the financial crisis.
The pension asset shortfall for state plans fell in 2021 to its lowest level since the financial crisis, but then widened in 2022 to again eclipse $1 trillion in total unfunded liabilities.
Total unfunded liabilities for state and municipal projects jumped from $248.8 billion in 2007 to$1.35 billionin late 2009. The funding gap widened to a cap of $1.70 trillionin 2020 before falling again to $933.0 billion in 2021.
We estimate that unfunded liabilities will increase again in$1.40 billionin 2022 due to poor market performance.
State and local employee contributions to their own pension plans have steadily increased.
Public sector workers who are also registeredSocial Securitythey paid 160 basis points more (36.5% more) in fiscal year 2022 than in fiscal year 2001 and 23.7% more than in 2008 before the financial crisis.
Those who are not in Social Security pay 14.3% moreThis yearsince 2001 and 10.1% more than in 2008.
State employer contributions have risen steadily over the past two decades, largely due to increased amortization payments on unfunded liabilities.
The combined contributions from state and local employers in 2001 were 9.02% of payroll. In the fiscal year ending in 2022, employer contributions represent 30.43% of the payroll.
Negative net cash flow from contributions and benefitsPayments have risen steadily over the past two decades, reflecting more"maduro"pension plans.
There are 64 programs with assumed rates of return above the current median of 6.9%, including 21 programs with assumed rates of return of 7.5% or higher.
There are 80 plans with a hypothetical return of 7%, a category that included CalPERS until July 2021 (when they announced the change to 6.8%). Among the 84 plans that were ahead of their peers in adopting more conservative return assumptions, only 34 assumed returns of 6.5% or less.
Internal Trends: State and Local
Some states do better with their funding than others. Factors among the best-performing states include: higher contributions, adoption of risk-sharing policies for pension plans, and historically strong funding policies.
The state's weighted average funding ratios for the fiscal year ending in 2021 appeared as strong as they have been in more than a decade.
(Video) Can you inherit a spouse's state pension if they die?
Among all state plans, 153 of 167 reported their final numbers for 2021. Among local plans, 42 of 61 reported numbers for 2021.
There is likely to be a significant reduction in capitalization among most state and local pension funds.in fiscal year 2022, causing a decrease in the overall average ratios financed by the State.
Of the 95 plans with a funding rate greater than 90% in reported 2021 data, we estimate that 34 will drop to 80% or 70%. We also estimate that there will be 6 plans downgrading from Fragile to Underfunded status based on 2022 results.
Financial market volatility has meant that most plans have seen funding ratios decline from 2019 to 2020, after strong increases in 2021 and now leveling off with poor investment performance in 2022.
There will be varying levels of funding rate change from 2019 (before the pandemic) to 2022, when the final plan figures are available. However, it is likely that by 2022 most government-sponsored households will be in better shape than they were in 2019.
The capitalization rate is a quick first look at the health of a retirement plan, but it's not the only factor to measure. Actuarial assumptions, financing and governance policies are also important.
The funded ratio of a pension plan may have decreased because the pension board made more realistic actuarial assumptions.
Funding ratios for state and local plans also tend to move together, as the same dynamics of underperforming investments and changes in actuarial assumptions have affected overall finances.
Most unfunded public pension liabilities fall within state pension systems, mainly because they are simply larger, with more members and more promised benefits.
The overall funding ratio for plans managed by municipalities in 2021 was collectively close to the highest point in recent history.
The overall state plan funding rate is below 2008 levels. However, the trend from 2019 to 2022 still shows improvement despite losses in 2022.
Do COLAs keep up with inflation?
Among the states that have COLA rules, only a select group of public retirees have a reasonable hope that their pension benefits will keep pace with inflation: those with fixed-rate automatic COLAs or inflation-linked automatic COLAs.
In general, there are three policy frameworks for automatically awarded COLAs:
- Fixed Rate COLA: A specified predetermined percentage increase in benefits (minimum dollar amount).
- Inflation-Linked COLA: A percentage increase in benefits based on the National Consumer Price Index (CPI), a local CPI, or the Social Security inflation rate. The actual value is usually "up to" a maximum percentage, such as 2% or 3%.
- Plan Performance Linked COLA: A rate of benefit growth that depends on the capitalization rate and/or the investment performance of the underlying pension plan. The actual amount is also often "up to" a maximum interest rate, but that maximum interest rate is determined by the specific performance clauses of the plan. For example, the maximum COLA rate can be cut in half or suspended if the pension fund is below 80%.
Inflation protection is important to ensure benefits continue to provide retirement income security as planned.
State and local pension plans and hybrid plans currently provide a wide variety of rates and cost-of-living adjustment (COLA) rules. Most plans have linked COLA rates to inflation, but about 168 state and local pension plans do not have automatic COLAs.
Looking to the future
We expect tax rate increases to continue to rise as states, cities, counties, and school districts struggle to meet their unfunded liabilities. One of the drivers will be the continued decline in the average expected rate of return, a policy move that will be positive for state and local pension plans in the long run, but fiscally painful in the short run. Population turnover will continue to put pressure on cash flow, which could also create additional fiscal challenges.
Two factors remain unclear at this point:
1) Whether public pension fund investment managers will continue to invest in alternative investment categories, such as private equity, or whether lower hypothetical rates of return will lead to a reassessment of how assets are allocated. Is
2) Whether the numerous supplemental payments made by states to their pension funds over the past year will have a significant effect on the funding trajectory of the program."
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FAQs
What is the state pension funded ratio for 2022? ›
Public pension funds' average funding ratio increased to 77.8% in 2022, with the majority of pensions' revenue (68%) coming from investment returns, according to an annual study by the National Conference on Public Employee Retirement Systems (NCPERS).
How much will local government pensions increase in April 2023? ›The Order is currently linked to the Consumer Prices Index (CPI) and is based on CPI as at the previous September. CPI at September 2022 was 10.1% which means that your pension will increase by 10.1% from 10 April 2023.
How much will my Social Security be reduced if I have a pension? ›How much will my Social Security benefits be reduced? We'll reduce your Social Security benefits by two-thirds of your government pension. In other words, if you get a monthly civil service pension of $600, two-thirds of that, or $400, must be deducted from your Social Security benefits.
What is the pension cut for 2022? ›The average COLA was 1.58% in 2022 for inflation-adjusted pensions, compared with Social Security's 5.9% adjustment. That gap has the potential to be even wider, as inflation accelerated to a 41-year record rate of 9.1% in June.
Which state has the highest percent of pensions funded? ›| State | Funded Ratio | |
|---|---|---|
| 1 | Washington | 120% |
| 2 | District of Columbia | 112% |
| 3 | Tennessee | 106% |
| 4 | Delaware | 105% |
The Retirement System Board of Trustees also met this week and made its final recommendation of a 2% bonus for retirees in both 2023 and 2024, paid by the general fund.
Is the local government pension scheme good? ›The Local Government Pension Scheme is often viewed as one of the most valuable financial rewards of your job providing you with a secure, Government backed, guaranteed income, when you retire.
Does a deferred local government pension increase in value? ›The value of your deferred pension will increase each year in April in line with government orders, currently the Consumer Price Index (CPI). You cannot pay any more into your pension after it has become deferred.
How do I get the $16728 Social Security bonus? ›To acquire the full amount, you need to maximize your working life and begin collecting your check until age 70. Another way to maximize your check is by asking for a raise every two or three years. Moving companies throughout your career is another way to prove your worth, and generate more money.
Can you collect both a government pension and Social Security? ›
Can I collect Social Security and a pension? Yes. There is nothing that precludes you from getting both a pension and Social Security benefits. But there are some types of pensions that can reduce Social Security payments.
Will my pension hurt my Social Security? ›In the vast majority of cases, no. If the pension is from an employer that withheld FICA taxes from your paychecks, as almost all do, it won't affect your Social Security retirement benefits.
Are pensions in trouble? ›The short answer is no. Despite headlines claiming that state pension funds are in trouble, there is no widespread crisis of public pension plans facing the prospect of near-term insolvency or bankruptcy. However, there are many states and pension plans that face dire long-term sustainability challenges.
What is the average pension in the US per month 2022? ›According to the Social Security Administration, for 2022, the maximum Social Security benefit you can receive each month is $3,345 for those at full retirement age. The estimated monthly average Social Security income is $1,657, after a 5.9% cost-of-living adjustment.
What is the minimum pension in USA 2022? ›As of 2022, the average Social Security monthly benefit for retired workers is $1,657, while the full special minimum benefit for a worker with 30 years of service is $950. The number of low-income earners receiving the special minimum benefit has declined from 200,000 in the 1990s to 32,000 as of 2019.
What states are in pension trouble? ›Most recently, in the face of potential budget shortfalls and fiscal uncertainty from the pandemic, a few states—including California, Colorado, Kansas, Oklahoma, Oregon, and South Carolina—postponed planned pension contributions for fiscal 2021.
Who has the best pension? ›- Iceland.
- Netherlands.
- Denmark.
- Israel.
- Finland.
- Australia.
- Norway.
- Sweden.
Average Monthly Retirement Income
According to data from the BLS, average incomes in 2021 after taxes were as follows for older households: 65-74 years: $59,872 per year or $4,989 per month. 75 and older: $43,217 per year or $3,601 per month.
The retirement gratuity payable for qualifying service of 33 years or more is 16½ times the Basic Pay plus DA, subject to a maximum of Rs. 20 lakhs.
What is the maximum lump sum pension? ›Contents. From 6 April 2023, the amount of tax-free lump sum you can take is 25% of your pension pot, up to a maximum of 25% of the standard lifetime allowance.
What is the maximum pension contribution for 2023? ›
The amount individuals can contribute to their 401(k) plans in 2023 will increase to $22,500 -- up from $20,500 for 2022.
What changes are coming to Social Security in 2023? ›Social Security recipients will get an 8.7% raise for 2023, compared with the 5.9% increase that beneficiaries received in 2022. Maximum earnings subject to the Social Security tax also went up, from $147,000 to $160,200.
What is the latest Cola estimate for 2023? ›While the 2022 COLA adjustment was 5.9%, government inflation data showed costs grew at a faster pace for much of last year. Now, the 8.7% COLA for 2023 is outpacing current inflation, with a 5.8% increase over the past 12 months for the consumer price index for urban wage earners and clerical workers, or CPI-W.
What is the COLA for 2023 for pensions? ›Effective July 1, 2023, the COLA rate is 2.90% for those with a retirement date on or before July 1, 2022. The COLA for UC-PERS Plus 5 benefit recipients is also 2.90% (set as the same as the COLA for UCRP benefit recipients with a retirement date of October 1, 1991).
Which state government has the best pension plan? ›Wisconsin
Wisconsin has got the most of its total pension system funded for the future; it has the largest funding ratio of any state in the country.
What the 85-year rule means for you depends on your age, the date you meet the 85-year and the date you take your LGPS benefits. If you are protected: and you take your benefits after you satisfy the 85-year rule, some or all of your benefits will be paid without reduction.
How much tax do you pay on a local government pension? ›Before 6 April 2023, when you took your benefits, if the capital value of those benefits was more than your available lifetime allowance, you had to pay tax on the excess. If your excess benefits were paid as a pension, the tax charge was 25% of the excess. The ongoing pension payments were also subject to income tax.
Does my local government pension go up with inflation? ›The scheme's revaluation occurs on 1 April each year, which is the first day of the LGPS scheme year. This means that on 1 April each year, active members' CARE pensions are revalued to take account of the impact of inflation over the previous scheme year.
Did local government retirees get a raise? ›In late January the Local Governmental Employees' Retirement Board, which governs the state's local government pension system, approved an across-the-board 2 percent bonus for local government retirees.
Do government pensions get cost of living increases? ›Yes. We make cost-of-living adjustments each year to the amount we pay to annuitants.
How do I get the $16000 Social Security bonus? ›
- Option 1: Increase Your Earnings. Social Security benefits are based on your earnings. ...
- Option 2: Wait Until Age 70 to Claim Social Security Benefits. ...
- Option 3: Be Strategic With Spousal Benefits. ...
- Option 4: Make the Most of COLA Increases.
Average Social Security retirement benefits in 2023
Average payments for all retirees enrolled in the Social Security program increased to approximately $1,827, according to the Social Security Administration (SSA).
In 2023, the average senior on Social Security collects $1,827 a month. But you may be eligible for a lot more money than that. In fact, some seniors this year are looking at a monthly benefit of $4,555, which is the maximum Social Security will pay. Here's how to score a benefit that high.
Does a pension count as income? ›If you receive retirement benefits in the form of pension or annuity payments from a qualified employer retirement plan, all or some portion of the amounts you receive may be taxable unless the payment is a qualified distribution from a designated Roth account.
What will replace Social Security? ›In the proposals presented to the Commission, the use of retirement bonds--and annuities based on bond accumulations- would also replace the entire benefit structure of Social Security for the future.
Where can I retire on $800 a month? ›Ecuador. If you're looking for a country where you can retire outside the US comfortably with $800 per month and experience one of the most ecologically diverse places in the world, then Ecuador might be for you. The go-to city for US retirees in Ecuador is Cuenca, which also happens to be a UNESCO World Heritage site.
Do I have to report my pension to Social Security? ›Pension payments, annuities, and the interest or dividends from your savings and investments are not earnings for Social Security purposes. You may need to pay income tax, but you do not pay Social Security taxes.
What kind of pensions affect Social Security? ›The Government Pension Offset, or GPO, affects spouses, widows, and widowers with pensions from a federal, state, or local government job. It reduces their Social Security benefits in some cases.
What income reduces Social Security benefits? ›If you are younger than full retirement age and earn more than the yearly earnings limit, we may reduce your benefit amount. If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2023, that limit is $21,240.
Are pension plans losing money? ›Public pension plans in the U.S. saw significant losses in 2022 as interest rates rose and stock markets tanked.
What happens to pensions if stock market crashes? ›
If the market falls, your pension assets may decrease, potentially reducing the amount of money you have available for retirement. Market volatility can also have an effect on the value of your investments, resulting in fluctuations in the value of your pension assets.
Do people with pensions live longer? ›They also live longer, studies show. That makes sense because the No. 1 worry of retirees is of running out of money. Individuals who have a set income for life remove a great deal of stress from their lives.
Is $4,000 a month a good pension? ›First, let's look at some statistics to establish a baseline for what a solid retirement looks like: Average monthly retirement income in 2021 for retirees 65 and older was about $4,000 a month, or $48,000 a year; this is a slight decrease from 2020, when it was about $49,000.
Is 3000 a month a good pension? ›If you have a low living cost and can supplement your income with a part-time job or a generous pension, then retiring on $3,000 a month is certainly possible. However, if you have a high living cost or rely solely on Social Security benefits, retiring on $3,000 a month may be more difficult.
How much does the average retired person live on per month? ›Typical Spending in Retirement
Average annual expenses for people ages 65 and older totaled $52,141 in 2021. 48% of retirees surveyed reported spending less than $2,000 a month in 2022. 1 in 3 retirees reported spending between $2,000 and $3,999 per month.
The lowest minimum PIA in 2023, with at least 11 years of work, is $49.40 per month. The full minimum PIA, which requires at least 30 years of work, is $1,033.50 per month.
What is the average Social Security income? ›Social Security offers a monthly benefit check to many kinds of recipients. As of February 2023, the average check is $1,693.88, according to the Social Security Administration – but that amount can differ drastically depending on the type of recipient. In fact, retirees typically make more than the overall average.
Can a person who has never worked collect Social Security? ›Social Security has many different programs and types of benefits, including retirement, disability and survivor's benefits.
What is pension funded ratio? ›The funding ratio reflects a pension fund's current financial position, expressing the ratio between available assets and liabilities.
What is the average funded status of a pension plan? ›The national average funded ratio for U.S. state and local public pension plans is estimated to have declined 6.6% last year, from 83.9% in 2021 to 77.3% in 2022, according to a recently released end-of-year report on public pensions from the Equable Institute.
How is the funding level for a state's pension plan determined? ›
Under current accounting standards, the funding con- dition of a public pension plan is expressed by its actuarial funding level, determined by dividing the actuarial value of the plan's assets by its liabilities.
What percentage should my pension be? ›12.5% of earnings is our general recommendation, but the actual amount you'll need to save depends on your own situation. For example: When you start: The earlier you start, the less you'll need to save each month.
What is the formula for pension funded ratio? ›Determining your funded ratio is easy to calculate: take your total assets and divide them by your total spending needs in retirement. Since it gets represented as a percentage, it gives you and your advisor an easy way to check how you're doing. If your funded ratio is above 100% — congratulations!
What percentage of your income is your pension? ›A typical multiplier is 2%. So, if you work 30 years, and your final average salary is $75,000, then your pension would be 30 x 2% x $75,000 = $45,000 a year.
What is a decent pension? ›The 50 – 70 rule is a quick estimate of how much you could spend during your retirement. It suggests that you should aim for an annual income that is between 50% and 70% of your working income.
How do I know if my pension is fully funded? ›Fully funded is a description of a pension plan that has sufficient assets to provide for all the accrued benefits it owes and can thus meet its future obligations. In order to be fully funded, the plan must be able to make all the anticipated payments to both current and prospective pensioners.
What is the average pension payout? ›What Is the Average Retirement Income? For adults 65 and older, the average income is $75,254, according to the most recent research published by the U.S. Census Bureau in 2022. The median income, on the other hand, is $47,620. Adjusted for inflation in 2023, those numbers become $83,085 and $52,575.
What happens if a pension plan is over funded? ›Reversion occurs when a company terminates an overfunded pension plan. The excess assets (overfunded amount) is reverted back to the company. It is then subject to an excise tax of 50%. In addition, this amount is subject to federal income tax as well as state incomes taxes.
How does a pension plan payout? ›A monthly pension payment gives you a fixed amount every month over your whole life, so you don't have to worry about changes in the stock market. In contrast, a lump-sum payout can give you the flexibility of choosing where to invest or save your money, and when and how much to withdraw.