Public Pensions Contend with Falling Markets and Rising Inflation

Fiscal year 2022 has been difficult for state and local pension plans – with record investment losses and rising pension outlays due to inflation. This experience is in sharp contrast to 2021, when pension funds enjoyed higher investment returns, as well as increased contributions from sponsoring governments. This brief updates the status of state and local plans as of 2021 and uses what we know about 2022 to estimate their current condition. The discussion is organized as follows. The first section shows that, over the two-year period of 2021 and 2022, the funded ratio for public plans first rose and has since fallen back to about 74 percent. The second section explores how the recent rise in inflation affects pension outlays, arguing that limits to cost-of-living adjustments (COLAs) mute the impact of inflation on pension fund finances. The flip side, of course, is that the limited COLAs also erode the purchasing power of retiree pension benefits, which is especially harmful to those not covered by Social Security. The final section concludes that pension funds continue to muddle along, with the recent rise in inflation impacting the finances of retirees more than the pension funds themselves.