Public Pension Funding Hits 86%, Highest Since 2007
Strong investment returns have pushed U.S. public pension funding to its best level in nearly two decades. But with stock market gains concentrated in a small group of AI-related companies and more than $1 trillion in unfunded liabilities remaining, researchers caution that the recovery depends heavily on markets continuing to cooperate.
State and local pension plans are an estimated 86% funded as of Sept. 30, up from 81.2% in 2025 and the highest national average since 2007, according to the Equable Institute’s October update to its State of Pensions 2026 report. The institute had estimated 85% in July.
Plans posted average fiscal-year investment returns of 11.4%, exceeding their average assumed rate of return of 6.88% for the fourth straight year. Plans that have reported full-year preliminary results averaged 13.78%, suggesting the final figure could be higher.
The total funding shortfall is expected to fall to $1.06 trillion from $1.36 trillion in 2025, marking the third consecutive annual decline, the first such streak since the global financial crisis. Unfunded liabilities remain above their recent low of $1 trillion in 2021.
Equable warned that recent gains could reverse quickly, as they did in 2022, if a market correction hits AI-linked stocks, which pensions hold through both public equities and private market investments.
The institute pointed to an opportunity in higher interest rates. The gap between the 10-year Treasury yield and pension plans’ assumed returns is the smallest it has been this century, allowing funds to lock in higher bond yields and shift toward more stable, if lower, returns.
Funding levels vary widely by state. Twenty-one states are considered resilient, at 90% funded or higher, led by Washington, D.C., at 112.6%, Nebraska at 109.8% and Tennessee at 106.9%. Twenty-eight states are fragile, while New Jersey, at 57.4%, and Illinois, at 57.1%, are distressed.
“Public pension funds today are recovering, but they are not yet secure,” the report said.