How Sensitive Is Public Pension Funding to Investment Returns?

Alicia H. Munnell, Jean-Pierre Aubry, and Josh Hurwitz
Publication Date: 
September 2013

To assess the sensitivity of pension funding to investment returns, the analysis projects funded ratios through 2042 for large public plans using:

  • a stochastic model of year-to-year returns; and
  • a median real return of 4.45 percent, the average used by plans in 2012.

The baseline results show that the funded ratio for the 50th-percentile outcome does not reach 100 percent because:

  • plans pay only 80 percent of annual required contributions (ARC); and
  • amortization approaches produce inadequate contributions.

Paying 100 percent of the ARC and using more robust funding approaches leads to near full funding by the end of the period. However, even under these more favorable scenarios, the variability of returns still poses risks of funding shortfalls.