State of Pensions 2025: “Surviving, Not Thriving” 

America’s public pension systems are enjoying another year of apparent health, but the foundations remain precarious. The national average funded ratio for U.S. public pensions climbed to an estimated 83.1%, up from 74.9% in 2022, reflecting one of the strongest three-year stretches of funding improvement in a decade, according to a new report. This growth, fueled by robust financial markets and record-high contributions from state and local governments, accounts for roughly three-quarters of the total funding gains achieved since 2015. 

Despite this positive trajectory, more than $1.2 trillion in unfunded liabilities persists across state and municipal systems—even as global financial markets hover near all-time highs, according to the Equable Institute’s State of Pensions 2025: October Update.  

The report’s authors, Anthony Randazzo and Jonathan Moody, describe the state of public pensions as “surviving, not thriving.” Despite a three-year stretch of gains, pension systems are still one bear market away from retracing a decade’s worth of progress. 

“The major reason why unfunded liabilities are stubbornly high is that contribution inflows over the last several years have been less than interest growing on pension debt,” Randazzo, Equable Institute’s executive director, told Connect Money. 

“Similar to how making a minimum payment on a credit card won’t stop debt from accumulating even today’s elevated contribution rates and good investment returns haven’t been enough to drive unfunded liabilities below the $1 trillion mark,” he added. “That said, there are some signs that public plans have turned a corner and contribution rates are now (as of last year) at least greater than interest on the pension debt, at least nationally. This is an issue we’ll be monitoring closely in 2026 data to see if it’s a sustained trend.” 

To provide perspective, after the extraordinary 25% investment returns of 2021, the national funded ratio briefly touched 83.9%. Had public plans been able to sustain steady, incremental growth from that point, the national funded ratio might have surpassed 90% today. Instead, pension funds were whipsawed by sharp losses in 2022—driven by inflation, rate hikes, and market corrections—followed by strong recoveries in 2024 and 2025. The rebound has lifted balances, but the lingering volatility has kept unfunded liabilities stuck below 2021 levels. 

The report highlights that the pattern of “boom-bust” investment cycles has made pension funding inherently fragile. The massive 2021 gains were nearly erased in 2022, creating a two-year “reset” that has since stabilized but not solved underlying issues. Equable notes that the same fragility that caused plans to lose ground after prior surges could reappear soon: with rising tariffs, geopolitical risk, and slowing labor markets, a market downturn in fiscal 2026 or 2027 could quickly reverse recent progress. 

“The recovery for public pension plans that we are seeing now is slow and fragile, but it is real. Some of the improved funded status over the last three years has come from supplemental contributions and a slowdown in the growth of promised benefits — neither of which is financial market dependent,” Randazzo added. “However, most of the growth in assets has come from particularly good investment returns that if reversed will send public plan funded status spiraling back down.”   

Policymakers are increasingly reluctant to keep funneling large sums into pension debt reduction, yet the sustainability of funding improvements depends on continued fiscal discipline. Contributions from state and local governments have reached record levels, exceeding 25% of payroll in some jurisdictions, the report noted. However, Equable cautions that these gains are built on thin ice: public budgets strained by debt service, healthcare costs, and inflation could make sustained contribution increases politically untenable. 

“Current contribution rates are likely sustainable for most states—with exceptions for municipalities like Chicago that are severely revenue-constrained. The real challenge is that contribution rates need to continue growing to help public plans improve, which states are not going to want to do in the current economic climate,” Randazzo added. 

From a return standpoint, public pension portfolios achieved an average return of 8.6% for FY 2025, exceeding assumed rates of return for the third consecutive year, according to the report. Among the 17 largest state and local pension funds, public equity portfolios returned an average of 15.9%, helping drive strong performance across the board. Still, the report stresses that these returns do not constitute a structural fix. The rolling 10-year average return improved for the first time since 2021, but the gains are contingent on a handful of strong years masking persistent systemic risks. 

Equable’s October analysis draws on data from 253 public retirement systems, representing over 95% of total U.S. pension liabilities. As of September 30, 55% of plans had reported preliminary FY 2025 results, indicating widespread improvement in funded ratios but also widening disparities among states. 

The report introduces an updated “Pension Fragility Map,” which classifies states into four categories—Resilient, Fragile, Distressed, and Unsustainable—based on funding ratios, contribution policies, and cash flow sustainability. 

• Only 17 states fall into the Resilient category (funded above 90%), 

• 30 states remain Fragile (funded between 60–90%), and 

• 4 states are classified as Distressed (below 60%). 

The map reveals that while headline funding levels have improved, the structural soundness of many plans has not. States that appear well-funded on paper often rely on optimistic return assumptions or temporary market windfalls rather than stable contribution policies. 

The report further warns that public pensions face a “political risk cycle.” When funding improves, legislators often reduce contributions or divert surpluses elsewhere—actions that inevitably lead to renewed funding gaps when markets turn. Equable emphasizes that real progress will require more than favorable markets; it demands systemic reforms such as realistic actuarial assumptions, automatic contribution adjustment mechanisms, and investment diversification that balances growth with liquidity. 

“The greatest structural risk to public pensions is “valuation risk” — that is, the risk that the way assets are marked today is overstating the long-term actual value of those assets,” Randazzo warned. “For some public plans, though, the size of their valuation-marked assets (generally private capital and real estate) is large enough that unrealistic valuations could be significantly overstating assets. That in turn could mean today’s contribution rates are insufficient, which in turn would mean long-term solvency concerns.” 

The institute concludes that while 2025 marks another year of apparent progress, the system remains fundamentally fragile. The U.S. public pension system’s ability to maintain its gains depends not on short-term returns, but on the willingness of policymakers to continue disciplined funding, reform amortization practices, and avoid complacency during good years.