The path to retirement can be a bumpy one. But, with the proper planning, you can enter retirement with your ducks in a row.
Despite the challenges, some states have gotten pensions back on track. Our interactive map shows how. It also grades the relative security of state pension plans.
Affordability
After a lifetime of work, you finally have the chance to enjoy the “golden years” that retirement promises. You’ll spend a lot of time in these years and want to ensure your expenses are covered as much as possible.
Fortunately, many people will get a steady income from their state pension for the rest of their lives. They’ll also have a few other sources of retirement income, such as 401(k) plans and individual retirement accounts (IRAs).
State retirement and pension system can help fill the gaps in a retiree’s income. They typically provide a minimum of a worker’s final average earnings (FAE) in exchange for at least one-third of their total pay.
By allowing workers to contribute to their pensions during their working years, states can build enough assets to meet future obligations. Over the long run, states can avoid juggling competing priorities and undermining retirement security.
During the stock market boom in the late 1990s, asset growth exceeded expectations and contributed to surpluses in several states. These surpluses were then used to reduce contributions or increase benefits. The 2008 financial crisis caused a sharp decline in pension assets, but they have grown to almost $3 trillion over the past few years. As a result, most significant state and local pensions are fully funded or close to it.
Flexibility
As the world around us changes, pension systems must also be flexible. They need to adapt to shifts in economic conditions, demographic changes, and other factors that affect costs. They also need to be flexible in their methods to determine funding needs. For example, many states adopt “asset smoothing” that phases in the effect of significant stock market fluctuations. A typical smoothing path recognizes one-fifth of the difference between actual and expected investments over five years.
After a decade of policy improvements, including benefit reforms and changes to actuarial assumptions, state retirement systems nationwide have collectively met the net amortization benchmark for the first time since our initial assessment of their health. And assuming that once-in-a-generation investment returns continue, these trends should continue into 2021.
These improvements have allowed most state plans to stabilize operating cash flow—the difference between benefits payments and contributions. When these flows are too low, it increases the risk that a pension system will run out of money over time, especially when it is under pressure to make annual deposits during an economically volatile period. This kind of volatility can put pressure on the budgets of state and local governments, which often compete with pension funding for scarce resources.
Social
Providing reliable income in retirement is crucial to allowing people to live in dignity. With such a guarantee, some would be willing to marry or have children, others might struggle to afford necessities and medical care, and older people might find themselves doubly burdened as they try to help their families. State pension systems can also play a critical role in supporting older people by encouraging people to save for their futures and helping them do so through tax incentives and other tools like financial inclusion.
The good news is that, following years of investment returns and policy interventions, the nation’s state retirement systems ended fiscal 2021 in their best condition in over a decade. Based on the latest data, projections suggest that total unfunded liabilities dropped below $1 trillion for the first time since 2008 as plan assets grew at a rate exceeding investment spending.
However, governments will need to take on additional reforms to ensure that the system meets its goals in the long run. Some of these, such as increasing the statutory retirement age to match longer life expectancies, will reduce benefits. In contrast, other measures, such as improving transparency and expanding access to private defined-contribution accounts, can boost savings. In tandem with further improvements to the financial sector, these efforts can strengthen state pension systems and create a foundation for a more secure retirement for all.
Health care
Retirement should mark a transition into a new chapter of life, liberating you from the annoying routines of work and providing the opportunity to pursue unmet hopes and ambitions. But for those with insufficient retirement incomes to cover basic living expenses, it can be stressful and adversity.
The good news is that for most people, state pension systems are not just able but poised to support your golden years with relative ease. After decades of underfunding, contributions to state retirement systems increased an average of 8% each year over the past decade, boosting assets and paying down debt. This improvement is due to strong investment returns, hefty retiree contributions, and a willingness by states to tackle pension problems head-on.
The gap between state pension benefits promised to workers and the money set aside to pay for them declined in fiscal 2021 to the lowest level since the Great Recession of 2007-09. These trends will continue, especially if states make further improvements in managing costs and risks.
NYSLRS members have access to an extraordinary Power of Attorney form that can be used to help with transactions related to retirement benefit matters. It can be found in your online account. We recommend creating an online account if you haven’t already done so.
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