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State of Pensions - The Era of Volatility: Asset Shocks, Inflation, and War

By Anthony Randazzo, Executive Director, and Jon Moody, Vice President of Research at the Equable Institute. Educating on public pension sustainability, accountability, and retirement income security.



The State of Pensions at the end of 2022 is Fragile.

The calendar year 2022 was not a great time to be managing pension fund assets. While a few hedge funds and money managers successfully navigated the choppy and volatile investment waters of 2022, most lost money. Some lost a lot. At one point during 2022, CalPERS was down around $80 billion from the $500 billion they'd started the year with — and there were just 15 states that ended 2021 with more than $80 billion in total assets under management.

Fortunately, the investment losses in 2022 didn't wipe out all the funded status gains from 2021. Unfortunately, the sharp losses this year have exposed — yet again — the lack of resilience plaguing many public pension plans.

Once all public pension plans release their 2022 data, we estimate that the combined funded status for the top state and local retirement systems will be 77.3% — factoring in estimates with data through December 31, 2022. This is down from the 83.9% funded ratio during fiscal year 2021.

Looking ahead there are warning signs everywhere:

1. Most major public market indices are effectively flat over the last six months.

2. Private equity returns get reported on a lag of up to six months, and with each update in 2022 values were coming down — which means 2022 numbers were including overstated private equity asset valuations and 2023 numbers are going to incorporate those losses.

3. The Federal Reserve is signaling more interest rate hikes with persisting inflation, war in Ukraine continues, and the end of China’s Zero-Covid policy will create near-term pressures on global commerce in 2023.

This means that, to-date, it is unlikely that most pension funds are on track to hit their assumed rates of return for 2023, even if they do generate a positive overall return. Pension fund trustees should be considering lower investment assumptions and state legislatures should be looking at larger contribution rates

The national funded ratio average is projected to decline from 83.9% in 2021 to 77.3% in 2022. States and cities have made full contributions to their pension funds and in many cases even provided supplemental contributions. But poor investment returns in 2022 have driven down the average funded ratio for state and local plans. This is a loss of roughly half of last year’s improvement.


The total pension funding shortfall will increase to $1.45 trillion in 2022, reversing the one-year drip below the $1 trillion line in 2021. Strong investment returns in 2021 led to a decline in unfunded liabilities down to $986.6 billion. That pension debt has increased back up to $1.45 trillion as of 2022’s calendar year end due to poor investment returns. Better-than-expected performance from private equity kept the increase from being larger.


A -6.1% average investment return for the 2022 fiscal year has erased nearly half of the funded ratio gains of 2021.

Preliminary 2022 investment returns show a -6.14% return on average for state and local plans (for the 2022 fiscal year as utilized by each plan, including data measured through December 31). All systems are forecast to miss their assumed return for the year, currently averaging 6.9%.

Last year’s incredible investment returns (24.8% on average) did include some future returns that were “pulled forward” and ultimately led to a market correction. The average return for 2020-2022 is 7.1%; capital market forecasts suggest the average return over the next decade is likely to be around 6%.

Most state and municipal pension plans in the United States are distressed or fragile.

Within the states, funded ratios and unfunded liability levels continue to vary considerably from state to state. For example, in California the State Teachers’ Retirement System is under 70% funded while the City of Los Angeles Fire and Police Pension Plan is 98% funded.

A few state pension plans still report a Resilient funded status (90% or better for three years continuously). However, the vast majority of U.S. pension plans have a Fragile (90% to 60%) or Distressed (60% or less) funded status.


How This Update Changes Our Findings for State and Local Pension Plans:

• The average 2022 estimated rate of return shifted from -6.0% (as of data through September 30) to -6.14% after factoring in reported preliminary returns and updated private equity data for the third quarter of 2022.

• The average 2022 funded ratio shifted from 77.9% (estimated as of June 30) to 77.3% based on updated return data and recently published actuarial valuations.

• Total 2022 unfunded liabilities shifted from $1.4 trillion (estimated as of June 30) to $1.45 trillion based on updated return data and recently published actuarial valuations.

• The average 2021 actual funded ratio shifted from 84.8% to 83.9% based on additional reported plan data.

• Total 2021 unfunded liabilities report shifted from $976.3 billion to $986.6 billion based additional reported plan data, notably for California Public Employees’ Retirement System.


Read and Download State of Pensions 2022 Year End Update Here.

About the Authors:

Anthony Randazzo is Executive Director at the Equable Institute.


Jon Moody is Vice President of Research at the Equable Institute.