Reason Foundation's 2025 Pension Solvency and Performance Report

A comprehensive overview of the current status and future of state and local public pension funds.

Reason Foundation's 2025 Pension Solvency and Performance Report provides a comprehensive overview of the current and future status of state and local public pension funds. As the nation navigates another year marked by significant economic fluctuations and demographic shifts, this report aims to assess the resilience and adaptability of U.S. public pension systems. This analysis ranks, aggregates, and contrasts plans based on funding, investment outcomes, actuarial assumptions, and other indicators.

In addition to 23 years of historical data, the 2025 report includes financial and actuarial data from Fiscal Year 2024, the most recent fiscal year that has been disclosed by most government plans.

Public pension systems in the U.S. saw a decrease in unfunded liabilities since the previous report, dropping from $1.62 trillion to $1.48 trillion, a 9% decrease. This was largely driven by fiscal year 2024's higher-than-expected investment returns.

State plans continue to carry the majority of the nation's pension debt burden, holding $1.29 trillion in unfunded liabilities, compared to local governments' $187 billion. The median funded ratio in the report's sample stood at 78%, a 3% increase since last year. This indicates that, while funding has improved over the last year, governments have only saved 78 cents of every dollar needed to provide promised benefits. Stress tests also suggest that public pensions remain vulnerable to market downturns. A single economic recession could increase the UAL significantly, potentially raising the state and local total to $2.74 trillion by 2026.

Evaluation Framework

This report evaluates state pension systems across five critical metrics: Funded Status, Investment Performance, Contribution Rate Adequacy, Asset Allocation Risk, and Probability of Hitting the Assumed Return. Each metric is an important indicator of a state's current pension funding and financial risk.

Together, these measures show which states have positioned themselves for long-term sustainability and which face escalating costs that will eventually hit taxpayers and threaten benefit security for public employees.

Funded Status

The funded status, expressed as a funded ratio, is the most straightforward indicator of a pension plan's financial health at any given point in time. To calculate the funded status, you simply divide the market value of a plan's assets by its actuarially accrued liabilities. In other words, this metric measures the extent to which a pension plan has accumulated savings relative to the estimated total liability of retirement benefits it has promised to its members. The result gives you a percentage that shows whether the system could meet its obligations if it had to pay them all today.

What the rankings mean: A higher funded ratio means a healthier, more secure pension system. A state ranked higher has more assets relative to its pension obligations. A ratio of 100% indicates full funding—assets equal liabilities. Above 100% indicates a surplus, while below 100% signals a shortfall, or "unfunded liability," that operates like a debt that taxpayers will need to cover, with interest, over time.

States with higher funded ratios are better positioned to weather economic downturns and less likely to require future tax increases or cuts to public services to cover pension shortfalls. The rankings are based on aggregate funded ratios across each state's public pension plans for fiscal year 2024.

Investment Performance

Investment performance measures the rate of return a pension fund earns on its portfolio, but this performance can't be judged in isolation. What really matters is how it compares to the plan's assumed rate of return (ARR), which is the long-term investment target that pension boards set based on their expectations for future market performance. This assumption is important because it is used in actuarial calculations to determine the present value of all future benefit payments and, consequently, how much money must be contributed each year. Since investment earnings are projected to cover the majority of a plan's long-term costs, consistently achieving the ARR is fundamental to a pension system's financial model.

What the rankings mean: Higher-ranked states have investment returns that consistently meet or exceed their assumed rate of return. Strong, consistent performance ensures the pension fund grows as projected, preventing the accumulation of new debt. When actual returns fall short of the ARR, the plan ends up with less money than anticipated, creating an unfunded liability that must be closed through higher contributions in the future.

States are ranked based on the difference between their 2001-2024 average investment return and their most recent assumed rate of return. States whose long-term returns exceed their assumptions rank higher, indicating a more sustainable investment strategy that reduces financial burden on taxpayers and enhances benefit security.

Contribution Rate Adequacy

Contribution rate adequacy measures whether the annual payments made into a pension system are sufficient to cover the cost of newly earned benefits while also paying down existing pension debt. A truly adequate contribution covers both the "normal cost", which is the cost of benefits earned in that current year, and an "amortization payment" to reduce any unfunded liability over a set period.

What the rankings mean: Higher rankings indicates states that are making more responsible funding decisions. States are ranked based on how closely their actual contributions match what actuaries say they need to pay. A smaller gap between required and actual contributions means better fiscal discipline and lower long-term costs for taxpayers.

Asset Allocation Risk

Asset allocation describes how a pension fund's investment portfolio is distributed across various types of assets. These typically include traditional asset classes like publicly traded stocks (equities) and government or corporate bonds (fixed income), as well as a growing category of "alternative investments." This alternative category includes assets such as private equity, hedge funds, real estate, and private credit. The fundamental goal of asset allocation is to strike a balance between risk and return that aligns with the fund's long-term objectives. Equities and alternatives offer potential for higher returns but come with greater volatility and risk, while bonds are generally more stable but provide lower returns.

What the rankings mean: For this analysis, higher rankings go to states with lower-risk profiles in their asset allocation. This means that states with more conservative portfolios, characterized by higher allocations to stable assets such as bonds or stocks and lower allocations to volatile and often opaque alternative investments, rank higher. Lower rankings indicate higher-risk investment strategies.

Probability of Hitting Assumed Return

This metric uses forward-looking capital market modeling to forecast the likelihood that a state's pension portfolio will achieve its assumed rate of return (ARR) over a 20-year period. It provides a risk-based assessment of how realistic a plan's investment assumptions are, given its specific asset allocation.

What the rankings mean: A higher probability means a plan's assumed return target is more attainable given its investment strategy and long-term market expectations. States with higher probabilities are less likely to accumulate new pension debt from investment return shortfalls, placing a smaller potential burden on future taxpayers. A higher rank indicates a higher probability of success.

Why These Five Metrics?

The interrelation of these five metrics reveals a dangerous feedback loop that can either stabilize or severely damage a pension system. The process often begins with unrealistic investment assumptions. When a plan's investment performance consistently fails to meet its high assumed return rate, its funded status deteriorates as liabilities grow faster than assets. This creates a funding gap.

In response to growing debt, policymakers facing budgetary pressures may fail (or are slow) to contribute at an adequate rate by making payments that are less than what actuaries determine is necessary to properly fund the plan. This political decision allows the debt to compound.

Simultaneously, pension boards, under immense pressure to hit unrealistic investment targets, often increase the plan's asset allocation risk by shifting funds from safer bonds into more volatile alternatives.

This sequence creates a highly fragile system: it's already underfunded, it's not receiving sufficient contributions to close the gap, and its asset base is now more vulnerable to market shock. This demonstrates how the very tools used to manage pension systems, assumptions, contributions, and investments can themselves become sources of profound systemic risk.

Authors: Ryan Frost and Mariana Trujillo

Data & Development Work: Truong Bui, Jordan Campbell, and Steve Vu