State and Local Government Spending on Public Employee Retirement Systems
Over $210 billion is distributed annually from state and local retirement trust funds to beneficiaries. Public pension are financed through a combination of contributions from public employers (an average of 26 percent of all public pension revenue from 1982 to 2011), employees (an average of 13 percent), and investment returns (an average of 61 percent). Retirement programs, however, represent a relatively small percentage of total government spending according to NASRA’s evaluation of U.S. Census Bureau data. On average, pensions represents only 3.7 percent of all government direct general spending.
Spending levels vary from the national average, from just over 1 percent (New Jersey) to more than 6 percent (Illinois). NASRA finds variation in pension spending is attributable to two factors: differences in benefit levels and the size of unfunded liabilities. After the economic crisis in 2008, many states and cities took steps to reduce costs and improve the financial condition of their retirement plans, increasing employee contributions or restructuring benefits. States who did not consistently pay their Annual Required Contribution (ARC) had to make greater adjustments to pay off much larger unfunded liabilities, in comparison to states who consistently paid their ARC. As a result, spending and plan adjustments have been generally proportional to the plan’s funding condition but also depend upon other factors such as the legal authority to change benefits or employee contribution rates.