Public Pensions Edge Toward Stability, but “One Bad Year” Could Erase Gains 

Public pension plans closed 2025 in better shape on paper, with higher funded ratios and a smaller national shortfall, but they remain “one serious market event away from giving back years of progress,” according to Equable Institute’s State of Pensions 2025 year‑end update. The group estimates the national average funded ratio for state and local plans will rise from about 78% in 2024 to roughly 82.5% in 2025, while unfunded liabilities fall to around 1.27 trillion dollars, helped by strong returns and record contributions. 

Equable Executive Director Anthony Randazzo cautions that 82.5% should not be mistaken for a healthy endpoint. Public systems that have maintained funded ratios “above 90% for at least three years in a row have historically proven resilient to financial crises,” he told Connect Money, adding that the ideal target is 100%, with the strongest plans between 100% and 120%. Resilient plans, he says, are those “able to handle one or two years of market downturns and then recover,” suggesting a data‑driven benchmark for a healthy national funded ratio would be consistently above 90%. 

Much of the recent improvement reflects tailwinds that can quickly reverse. Randazzo points out that “most of the funded ratio improvement over the last three years is related to financial market gains,” supplemented by higher state contributions and a slowdown in the growth of promised benefits. A single weak year can be costly: “A one‑year negative return in 2022 reduced the national average funded ratio from 83.9% to 74.9%. This vulnerability is why it’s wrong to consider a funded ratio above 80% to be healthy—just one bad year could wipe out multiple years of gains,” he says. 

To move from “surviving” to genuinely resilient systems over the next decade, Randazzo argues that the top priority is making sure annual contributions exceed the interest accruing on pension debt. “Ensuring contributions are at least greater than interest accruing on the debt is the most meaningful way that public retirement systems can establish a healthy, resilient funded status,” he says. That will require adjusting investment assumptions downward and increasing contributions as needed, which would lower the effective “interest rate” on pension debt, make it easier to pay down principal, and give investment teams room to shift toward less cyclical assets. 

For advisors and institutional allocators, Randazzo flags market signals as a key early‑warning system in 2026. With public plans heavily allocated to public and private equities, “any warning indicators of sharp public market declines or overvalued private markets are among the most important for state pension investment managers to monitor,” he says. The central question, Equable’s report concludes, is whether policymakers will sustain today’s elevated contributions and risk discipline long enough to push the system into that 90%‑plus zone—before the next downturn forces another hard reset.