ITR Experts Say: Unfunded Pension Liabilities Are a Lurking Danger

Economists frequently expound on the dangers associated with excessive debt, especially at the national level. The latest data puts U.S. public debt at 103.8% of Gross Domestic Product (GDP) as of the close of 2Q18. With debt consistently exceeding GDP – a marker not reached since the end of World War II – America continues to live beyond its means.

However, the debt problem isn’t limited to the nation as a whole; states are grappling with their own liability troubles. Look no further than state Percent of Pension Funded Ratios (PPFRs) to see the significance of the issue.

PPFRs are measured by comparing the value of state assets to accrued pension liability. Although the Government Finance Officers Association recommends that public pension plans have a funding policy targeting full funding (100%), 80% is considered a healthy level in reality. Data from Pew Charitable Trusts and the District of Columbia Retirement Board, below, shows that many states do have healthy pension funding levels. Unfortunately, numerous other states are not even close to 80% funding.


At 37.5% of pension funded, New Jersey is ranked last, with Kentucky very close at 37.8%. After several years of poor investment and reduced contributions, which contributed to the underfunding seen above, most states are lowering expected pension return rates.

Another way to highlight this problem is to examine the states' Unfunded Pension Liability Per Capita, which is the difference between the total value of pension benefits owed to current and retired employees or dependents and the plan assets on hand. The worst-performing states are highlighted below.


With deficits exceeding $9,000 per person, Alaska, Illinois, and New Jersey are ranked last in Unfunded Pension Liability Per Capita. New Jersey’s shortfall, more than $15,000 per person, is particularly egregious. These states are at the greatest risk of running out of pension funds in the future and will likely have to subject their populations to large tax increases, or increase state borrowing, to close their deficits.

While others may be less glaring, it is safe to say that most states (except South Dakota, which has a surplus of funds) are grappling with sizeable unfunded pension liabilities for their populations. As with most debt-related concerns, this presents a real danger to the long-term economic health of the United States.

Alex Chausovsky
Senior Consulting Advisor