A new report from Equable Institute, a US bipartisan nonprofit, shows an improved but still highly fragile situation for US public and local pension funds. It warns that fiscal pressures and market volatility risks could erase four years of progress, with both well-run and laggard pension plans facing headwinds into 2026.
Average US public pension fund contribution rate hit a record high 31.65% in 2025. Unfunded pension liabilities across public pension plans fell to US$1.27 trillion from $1.54 trillion in 2024. The funded ratio for public and local pension funds is projected to have risen to 82.5% last year from 78% in 2024.
But record contribution rates and strong returns, primarily from US equities, have still not made up for losses incurred in the 2022 market decline.
More than 30 states, including California, Colorado, Maryland and Washington, face structural budget gaps, with higher healthcare and education costs and slowing tax revenues. Maintaining high contributions in these states could be difficult.
Federal policy incoherence and macro risks could increase recessionary pressures in 2026 Back in 2021, strong returns secured solid funding ratios for US public pensions, but the market decline in 2022 pushed them down again. Rising risks of a market pullback from record highs could trigger a similar downturn in 2026.
Equable Institute recommends shifting away from high risk/high reward investment strategies, implementing serious plans to pay down unfunded liabilities, and targeting more realistic long-term performance assumptions. It remains to be seen whether the pension plans and state and local governments adopt the suggestions.
