Pension Reform News: Reason analysis shows debt drives the rise in pension costs

In This Issue:

Articles, Research & Spotlights 

• Analysis Shows Debt Drives the Rise in Pension Costs
• Ohio Bill Would Advance Shared Pension Responsibility
• California Pensions Rank High on Investment Risk, But Low on Returns
• Florida Still Has Decades to Go Before Fully Funding Pension Benefits

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
Reason Foundation in the News

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Articles, Research & Spotlights

Most Pension Contributions Go Toward Paying Off Debt, Not Funding Benefits

Pension benefits promised to public workers have become increasingly expensive, squeezing state and local budgets nationwide. A new analysis from Mariana Trujillo uses Reason Foundation’s Annual Pension Solvency and Performance Report to dive into the growth of public pension costs over the last decade. Since 2014, annual pension costs have risen by 26% nationwide, with some states, like New Jersey and Alaska, seeing their pension costs rise more rapidly than others. With employee contributions remaining relatively stable, taxpayers have had to bear the bulk of this growing burden. Trujillo’s analysis finds that public pension debt, not new retirement benefits, is the primary driver behind these trends. In fact, more than half of employer pension contributions (55%) are now allocated to address the estimated $1.5 trillion aggregate state and local public pension funding shortfall.

Ohio House Bill 473 Could Balance Public Pension Plan Contributions

New legislation under consideration in Ohio aims to improve transparency and balance the burden of pension costs between employees and employers. House Bill 473 would restrict state and local government employers from paying all or a portion of an employee’s contribution obligation, a practice commonly known as a “pickup.” While governments use pickups to attract quality workers, this practice masks the true cost of a retirement benefit and distorts market signals that are important for informed policymaking. In comments submitted to the Ohio legislature, Reason Foundation’s Zachary Christensen explained the value of collaboration between employees and the taxpayer (represented by lawmakers) in a retirement plan and the importance of transparency in that partnership. 

California’s Pensions Are Relying on Riskier Investment Strategies

Facing more than $265 billion in unfunded pension liabilities and ever-increasing costs on local governments, California’s pension systems are turning toward high-risk investment strategies they hope will offer high rewards. As Reason Foundation’s Zachary Christensen explains in a recent op-ed, every resident in the Golden State is on the hook for about $6,000 in pension debt, so there is real pressure for the state’s pensions to catch up with above-average investment returns. The California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) aim to achieve higher returns by increasing their investments in alternatives, such as private equity and hedge funds. However, this strategy also carries significant downside risk, which will ultimately be borne by increased costs on taxpayers.  

Florida Must Stay the Course to Pay for Promised Pension Benefits

New estimates indicate that the Florida Retirement System (FRS) will need at least 17 more years before reaching full funding, but lawmakers are considering adding to these already underfunded pension benefits with proposals to bring back cost-of-living adjustments (COLA) for retirees. Zachary Christensen and Steve Vu from the Reason Foundation provide analysis applicable to this discussion, finding that even without granting a new COLA, a single year of bad returns (0%) could still undo years of progress in the system’s funding. A major recession could extend the full funding date beyond 30 years and would require significant increases in annual costs on taxpayers. With these remaining risks in mind, lawmakers need to avoid diverting from the state’s current path through more risky promises to public workers.

News in Brief

Market Volatility Poses a Bigger Threat to Pension Stability Than Long-Term Averages Suggest

A new pair of whitepapers from Sage Advisory and First Actuarial Consulting shows that many public pension boards assume the same return every year—typically around 7%—even though markets rarely behave that way. These fixed-return models make plans appear stable and fully funded, but they hide the real risks facing systems that pay out far more in benefits than they take in. When a plan has a large negative cash flow, early market losses matter much more than average returns. In these cases, trustees may be forced to sell assets during downturns, locking in losses and creating a long-term funding problem that the “smoothed” projections never reveal.

The second paper focuses specifically on this timing problem—known as sequence-of-returns risk—and explains why it is a structural issue for mature pension systems. When contributions are too small relative to benefit payments, the plan depends heavily on investment gains to maintain its funded status. But if significant losses occur early, the plan must liquidate assets at low prices to keep paying retirees. This shrinks the asset base, reduces future compounding, and can drive down the funded ratio even if markets recover later. Data from the largest plans illustrate this clearly: systems with the most negative cash flow experienced the most significant funding declines over time. The papers are available here and here.

Quotable Pension Quotes 

“Any time you give a benefit, and you don’t pay for it today, it’s like buying it on a credit card. You’re eventually going to have to pay the bill. And those decisions in the ‘90s have left us a large bill in 2026.”
–Mississippi State Sen. Daniel Sparks (R-District 5), quoted in “Mississippi’s PERS faces $26 billion debt,” WJTV, Nov. 6, 2025.

“In the late ‘90s and early 2000, there were some additional benefits placed into law without additional funding at the time. Also, in the two subsequent decades, we had a declining active to retiree ratio, meaning there were fewer active PERS covered members paying into the system and more retirees coming onto the system and retirees living longer.”
–Ray Higgins, executive director of Mississippi PERS, quoted in “Mississippi’s PERS faces $26 billion debt,” WJTV, Nov. 6, 2025.

“If the state fails Safe Harbor, then we would have to enroll everybody into Social Security. So that would more than double what we’re paying right now, […] Almost half our budget would have to go to pensions and Social Security. … So the cost of doing nothing is extreme.”
–Illinois state Rep. Stephanie Kifowit (D-Oswego), quoted in “Tier 2 pension reform bill moves forward, but Pritzker says there’s ‘a lot more work’ to do,” Capitol News Illinois, Oct. 30, 2025.

Data Highlight

Reason Foundation’s Mariana Trujillo explains why most state and local government pension contributions no longer fund current employee benefits. More than half of every dollar contributed to public pension plans now goes toward amortizing legacy pension debt—driven by decades of underfunding and overly optimistic return assumptions—rather than paying for benefits earned each year. Read the full analysis here.

Reason Foundation in the News

“Most plans are taking a lot more risk in their investment portfolio than they used to, and so there’s a lot more volatility than there ever was in pension plan returns.”
—Reason’s Ryan Frost quoted in “Illinois is tops in unfunded state and local pension liabilities per capita,” The Bond Buyer, Oct. 31, 2025.

“Over 40 percent of state and local government debt consists of unfunded pension and healthcare benefits promised to public workers. State and local pension debt amounts to $1.5 trillion, with an additional $1 trillion in healthcare benefits promised to retirees.”
—Reason’s Mariana Trujillo and Jordan Campbell writing in “State and Local Governments Are Drowning in Debt,” Inside Sources, Nov. 19, 2025.

“Yet few governments have set aside money to pay for their retirees’ future healthcare costs. The Reason Foundation reports that state and local governments faced $958 billion in retiree medical obligations in 2023, about $2,900 per American. The liabilities are largest in blue states like New York ($15,017 per capita), New Jersey ($10,599) and Connecticut ($6,657), which let workers retire early with generous health benefits.”
—Alyssia Finley writing, “The ObamaCare Blue-City Bailout,” in The Wall Street Journal, Nov. 7, 2025.

“The saying in the pension world is that most pension funds have been 20 years away from paying off their unfunded liabilities for the past 20 years.”
—Reason’s Mariana Trujillo quoted in “Unfunded pensions make up a large portion of California’s $1 trillion debt,” State Affairs, Oct. 31, 2025.

The post Pension Reform News: Reason analysis shows debt drives the rise in pension costs appeared first on Reason Foundation.

Source: https://reason.org/pension-newsletter/analysis-shows-debt-drives-the-rise-in-pension-costs/