# America's Pension Crisis Explained

- Channel: [Analyzing Finance with Nick](https://www.youtube.com/channel/UC7TEgC3UwJ2wI6m40rJOAFA)
- Published: 2026-05-10
- Source video: [Watch on YouTube](https://youtube.com/watch?v=sTSzQn_nfGg)
- Read on ReadTube: https://www.read.tube/p/videos/sTSzQn_nfGg
- Language: Original (source language)

## Summary

**America’s Pension Squeeze Deepens**

Public pension systems across the United States remain strained, with about 13.6 million active workers supporting 11.1 million retirees and roughly $1.5 trillion in unfunded liabilities. The speaker argues that recent improvements mostly came from strong markets and benefit changes, not from real structural reform, leaving states exposed if stocks fall. Illinois is highlighted as the worst case because its constitution blocks pension cuts and forces ever-higher taxes.

Public pensions are still one of the biggest fiscal problems in America. Across the 50 states, public systems hold about $6.7 trillion in assets but still face roughly $1.5 trillion in promised benefits that are not funded, with the median state only about 80% funded. The speaker says this is better than the mid-2010s, but the improvement mostly reflects a long bull market, not disciplined policy, and pension funds have still lagged a simple 60/40 portfolio over the same period.

The video argues that several forces explain the weakness: politically influenced investment choices, weak incentives for talented managers to work in the public sector, and generous return assumptions that keep liabilities looking smaller on paper. Many states also shifted new workers into two-tier systems or reduced benefits for younger employees, which slows the growth of future liabilities. Still, many pension plans remain vulnerable if markets turn down.

Key points in the state comparison include:
- Tennessee, South Dakota, and Washington are fully funded or better.
- Wisconsin, Oregon, Idaho, and Utah are among the stronger near-top states.
- Illinois is the worst, followed by Kentucky, New Jersey, and Mississippi.
- Higher corruption appears closely associated with worse pension funding.
- On a per-person basis, Illinois also has the highest pension debt burden.

The speaker says the most effective reforms have been higher contributions, benefit adjustments for new workers, and stricter funding discipline, with West Virginia presented as a better model than New Jersey. Illinois is portrayed as uniquely stuck because its constitution forbids cutting pensions, making bankruptcy unrealistic and tax increases the main remaining tool. That creates a doom loop: higher taxes push residents and businesses out, shrinking the tax base and making the pension problem worse.

The conclusion is that the system is less fragile than it was a decade ago, but still highly exposed to a bear market. Without deeper reform, states with weak funding and legal barriers like Illinois could face another pension crisis quickly if investment returns disappoint.

## Article

Chicago is not the most corrupt American city. It's the most theatrically corrupt. — Studs Terkel

Thank you guys all for coming here in Chicago. Speaking of Illinois, we are going to be talking about public pension systems across America. And sad to say for you guys and for your future tax payments, Illinois ranks really at the bottom in terms of the funded status of its pension, and a lot of systematic issues in this state are because of the pension system here and how it's legally written in its system to deal with paying for it.

But let's first kind of give a more macro view of public finance in terms of pension systems in the US and the US's public pension crisis overall.

### The scale of America’s public pension system

There are 50 states in America. Each of them have a pension system for their public employees. There are 13.6 million active public workers and there are 11.1 million retirees on public pensions. That ratio is almost one-to-one, which is not good if you have almost as many people drawing pensions than actually working. It's part of the reason why state taxes have had to rise gradually over the last several years just to finance these pension obligations.

The public pension system across all 50 states is the second biggest pension system in the world. The only one that's bigger is federal Social Security as a whole. The combined pension assets in the United States as of 2025 is about $6.7 trillion, and on top of that there's $1.5 trillion in pension payments promised but are as of now unfunded liabilities.

So, as a result, the overall median state in America has about 80% of its pension funded, which means that one out of every five dollars they don't really have the money to come up with. And this sounds bad, but it actually is an improvement, believe it or not. In 2015, when I started researching this subject, you had the pension system be at, depending on how you measured it, 72% to 74% at the median state. So even with a lot of the problems we have now, this is actually an improvement from the past.

And we've had 18 consecutive years where the pension system in the country has been below 90% funded. And the main catalyst that got it down below 90% funding was the GFC in 2008, which caused a lot of hits in equity portfolios. And this was also the time when boomers started hitting retirement age, so the pension liability started to go up at the same time you had a significant bear market.

But let's see. What we have to the improvement though we have to look into it because this improvement was not in most states because of some policy shift of fiscal responsibility. It was more just the market conditions at the time. Since 2015 the S&P 500 has tripled in value. And the private equity and private credit, which were popular assets for a lot of pension funds and institutional investors, also had banner performance over this same time.

Yet, despite pretty much having record investment performance for the last decade, your pension funding status only improved by about 10%. And if you can't be fully solvent in the best bull market ever, what does that mean for when we have a more choppy market in the future?

And so based on that data, every pension fund in the country now underperformed a 60/40 index. For those who are not familiar, the 60/40 index is what a lot of wealth managers put as their standard investment strategy. It's 60% stocks, usually like the S&P 500, and 40% bond index. That's kind of the standard benchmark, and the pension funds in the US greatly underperformed this.

I think there's a few reasons why they underperformed. One, I think a lot of them had certain politically driven motivations for certain investments, either that the fund manager had some sort of connections to power and they choose to allocate to that fund or a lot of ESG mandates that were really popular, and they invested for things based on what is perceived to be socially responsible or aligned with the political ideology of the state that they're managing the pension, and these were not goals to maximize returns, so I think it led to underperformance.

And also the other elephant in the room is that if you are somebody who is good at investing and want to manage money for a living, you'll go work at a hedge fund or you'll go start your own RIA. You're unlikely to want to work at a pension fund because they tend to have below market salaries and don't have the same kind of performance bonuses.

Instead of having football and basketball coaches being the highest paid state government employees, it should be their pension fund managers because their performance has the actual most hard dollars in terms of how it affects the taxpayer and any person in power.

You also had at this time the starting of two-tiered benefits systems for new public employees. After the GFC you had one set of pension for people who got a job before, say, 2011, and then people who've gotten jobs after 2011, they still had a defined benefit pension but it was cut or they switched to partial defined contribution plans. And as a result the future liabilities for the younger employees who are working are compounding at a slower rate, and that's also helped improve the funding status.

### Which states are solvent, and which are in deep trouble

So let's look at the national picture now and how it stands. There are three states that are fully solvent, which means they have more than 100% pension funding status in the US. That is Tennessee, South Dakota, and Washington state.

And there's a lot of others that are close, like in the 90s, which include Wisconsin, Oregon, Idaho, and Utah. And if you notice, it's not really a red or a blue state thing. There are red states that have good pension systems that are solvent, and there are blue states that do.

Let's go to the ones that are known for being quite bad on the bottom end of this. The worst four are the ones that are below 60%. So that's almost for every dollar they have saved up in their pension fund future liabilities, they almost owe an entire other dollar in unfunded liabilities.

And the bottom is Illinois, of course. You guys are only 52% funded. But despite being that bad, it's a considerable improvement. In 2015 you were at 38% to 41%, depending on how that was measured. So even despite having I think one of the biggest, the third biggest improvement in terms of your pension fund status of any state in the nation, you're still at the bottom.

The next one is Kentucky at 54%, and then the third worst one is New Jersey at 55%, followed by Mississippi at 56%. Two red states, two blue states. It's not again not really a partisan thing; it's these states are particularly bad at managing their pensions and are also known for being some of the most politically corrupt states in the union.

And that is generally a pattern. You'll see in the video version there'll be a scattergram where I show the data on this, but there is a very strong negative correlation between the level of corruption in your state, the level of perceived corruption in your state, and the funding status of your pensions. So the states that have the highest levels of corruption have also the worst pension funding, because often money that was supposed to be saved to put into the pension fund were probably used for personal pet projects or graft or other things like that. Whereas the states that tend to have the lowest level of corruption have the most solvent pension systems.

### Pension debt per person

And there is another side of this, and that's the per capita debt, pension debt. Like on a per person basis, how much does the average citizen in a state owe to pay for the pension of future public workers?

Illinois, the worst again, is almost $16,000 the average person in Illinois owes in pension debt for local state employees. Number two on that list is Connecticut at a little over $10,000 a person. Alaska is third at $9,990 a person. Hawaii at $9,800 a person, and New Jersey is also at $9,700 a person.

Again, it's not really a purely red or blue state thing. It's just mainly political mismanagement and, in the case of Alaska and Hawaii, dependency ratios. Hawaii is, as I mentioned in my video on Hawaii, the highest of one of the highest, if not the highest percentage of their population on Social Security or some military pension or some other government or retired government workers of any state really in the union.

And the states that made the biggest improvements were West Virginia and New Jersey. But they did it in really two different ways. New Jersey did it by intentionally lowering their funding stats to fund other political needs, and they just raised taxes to put that money back in. So it created a one-time bump. Whereas West Virginia did a restructuring of the way they pay their government employees and saved government surpluses into the pension system to balance it over time.

One of them did it in a sustainable way, which is West Virginia, and the other one did it in a less sustainable way in New Jersey.

### What has worked so far, and what still might work

So that's kind of what's going on now. So if we want to fix this problem, what needs to be done further and what has worked so far in the previous 10 years where the pensions have improved?

First thing is that, which I think most politicians' strategy is unfortunately, is hope and pray the S&P 500 keeps going up double digits every year. I don't think hope is a good investment strategy and it's not a good business strategy and it's not a good public policy strategy, but that's one way you can go about doing it.

The other one is that you mandate higher contributions for public employees. Maybe not switch to a full 401(k), but you have to have an increased requirement of contributions in order to keep the pension system solvent.

The other one is benefit cuts and two-tiered systems, which are already in the process in many states, but not here in Illinois, and I'll go into why that's the case later.

And then the other one is you can hope that boomers don't live as long as actuarial tables imply. But that gets kind of morbid really quickly. And the thing is that the highest paid employees, which are probably the ones with the highest pensions, tend to have much longer lifespans. There is a correlation between what income percentile you were in your career and your life. If you're in the top 10% of income in your working years, you're going to live on average till 90 years old.

The West Virginia model of mandating higher contributions and doing pension reforms is probably the way you would have to do something like that on the state level.

The other thing that is another elephant in the room here is the assumed rates of returns. A lot of these pension models are based on a certain implied assumed rate of return. Like, for example, Illinois. I don't know what the exact number is, but a lot of these states will, in order to keep the pension fund liability on paper to be low, they'll discount it by a higher discount rate than they should.

So depending on what you have the assumed required rate of return or interest rate is, that's how much you discount it every year. So if you have a higher expected return, you have a higher discount rate. And the problem is a lot of these governments, in order to keep that present value figure, the liability, down, they'll have a higher return rate. Like they'll have assumptions of 7%, maybe even 8% for returns for pension funds, which have liabilities that are consistently need to pay it out every year, which are the pension funds, and they need a more fixed income.

A more realistic target in terms of returns for pension should be maybe somewhere between 4 and 1/2 and 6% on the high end. If interest rates came down, you'd probably have to adjust those lower because you need to have returns similar to the bond market maybe in order to line up with your future liabilities.

If you lowered the required rates of return to something more in line with the market, a lot of these unfunded liability ratios will blow out again. But there's political reasons why we haven't done that obviously.

### Why Illinois is trapped

So now let's get back to Illinois. What is Illinois' problem here? Well, as I said before, they have the worst funded pension system, but on top of that in the Illinois Constitution, it is illegal to cut pensions. You just can't ever cut pensions no matter what. Even if they don't raise the pensions, the current trajectory is way insolvent and they can't cut.

And then so what is Illinois supposed to do? Well, when a business has a liability that they cannot pay and they cannot use they cannot cut restructure their costs, they go into bankruptcy. But Illinois is not going to file Chapter 9. I don't think there's been any state that has filed Chapter 9, which is the municipal equivalent of bankruptcy, I think since Arkansas during the Great Depression. I just don't really see that as a viable option for Illinois.

So then what is left? You can't file for bankruptcy, you can't cut the pension liabilities, so what is Illinois going to do? They're going to raise taxes. And that's what they've been doing.

Like Illinois raised its income tax I think from 3 to 5%. They've been trying to institute a progressive tax here for a while. And the thing is that Illinois has a relatively low income tax because that's been made up for by really high tax on everything else. Like Illinois has the highest sales taxes in the country, I think. They have some of the highest property taxes in the country. And they have a lot of other ways they nickel and dime you here in this state.

And they can't have to keep doing that because that's their really only hope. It's like you could try to grow the economy, but the problem really is that Chicago has a lot of vested interests that want the regulatory environment to be a certain way, which makes it less friendly for business here. And even if you made it a business-friendly state, the pension liability is too immediate that you cannot really cut taxes now.

Like if you did an economic growth type policy platform, you're probably going to have to absorb deficits in the early run of that, and Illinois doesn't really have the capacity for that. They're going to have to keep raising taxes, but then the problem is that people will move out.

### Why people leave, and why that creates a doom loop

And like Chicago's a nice city. I love coming here in the summer at least, but the problem really is that Chicago's climate and geography is not unique enough that people will stay here just because of that.

California has these problems, but the thing is that California has a Mediterranean climate that you can't really find anywhere else. And so it convinces people who would otherwise leave to stay. California also has a very entrepreneurial culture that is hard to replicate in other places. So people create wealth there disproportionately and it keeps California a lot more solvent despite having almost as mismanaged of a state as Illinois.

But when it comes to Illinois, you can just move 90 miles up north to Wisconsin and have a similar climate, you can be on the lake and have a lot less taxes and liability. Or you can go down southeast to Indiana. Maybe a little bit better weather, go watch the Indy 500. Even the Chicago Bears might be moving to Indiana. So if your own NFL team is considering leaving the state and still keeping the Chicago name, what does that say?

And then you could also go to Iowa or Missouri, who have similar climates and similar cultures and are much more business- and tax-friendly. Or you can say screw it, I'm tired of being in the cold and move to Florida or Texas or California. And California is not that bad because a lot of the Illinois people who moved to California are retirees, and California's highest taxes is income tax and its property tax are some of the lowest in the nation. So it actually makes sense for a Chicago retiree to consider moving to California.

That free movement out has led Illinois being one of the few states, I think, to see its population decline the last decade. Illinois has to raise taxes to cover the pensions, people leave, and there's fewer people to tax, and so they have to raise the taxes that much more to keep the pension system solvent. And this has become a doom loop for the last 10 years.

### The bottom line for the future of pensions

So the bottom line really is the pension system is not as catastrophic as it was 10 years ago, but if you have a bear market, you're going to see pension crisis in the news again. If the market can navigate the boomer transition without a major long sustained downturn in the equity markets, we might be okay. Otherwise, you're going to have to have serious public pension reforms.

And Illinois is constitutionally prohibited from making the reforms that other states have been able to do to get out of this problem. And it's not again a red state or blue state thing. There are plenty of blue states that have relatively solvent pension fund systems. I think Vermont is one of them. New York State is another one. So it's just because of the unique things that drive Chicago and by extension Illinois politics that is putting you guys in quite the bind.

And with that, I'm going to go to Q&A.