Successful Retirement Systems Offer a Roadmap for Other States

A review of proven practices to improve fiscal management, ensure security, and boost transparency

Issue Brief
Projects: Public Sector Retirement Systems
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Successful Retirement Systems Offer a Roadmap for Other States
The Pew Charitable Trusts

Overview

State and local retirement systems aim to balance multiple goals: providing plans that support government workforce objectives and ensuring that the cost of benefits is stable and sustainable over the long term, all while putting workers on a pathway to retirement security. However, after the financial market crash of 2008 and ensuing Great Recession led to devastating investment losses for state retirement systems that were already weakened by previous underfunding, most states were off track for meeting those goals.

Policy reforms and economic considerations have improved most retirement systems’ cash flow situation in the years since. Yet only a handful of states have been able to deliver stability and sustainability—amid economic ups and downs—while meeting workers’ retirement security needs. As part of its nearly 20 years of research on public retirement systems, The Pew Charitable Trusts examined these standout states to identify a framework of best practices for system design and management.

Although the leading systems differ in their benefit designs, they share several exemplary characteristics, including a path to retirement security for all workers within defined cost targets, a plan for managing risk, and a commitment to ensuring that policies are transparent and clearly communicated to stakeholders. The following four practices form the core of these states’ success. Pew’s framework includes these key practices as well as metrics for evaluating states’ success in implementing them:

  1. Offer benefits that give workers a path to retirement security, as demonstrated by:
    • Replacement income ratio—the share of workers’ preretirement take-home pay replaced by retirement benefit—of at least 90%.
    • Savings rate—the share of their annual salary that workers who leave a public job can take with them—of at least 10% for workers with Social Security coverage and at least 18% for those without.
  2. Fund pension obligations sustainably so that costs are predictable and affordable for government budgets, as demonstrated by:
    • Net amortization—the amount of money needed to pay for new benefits earned by current employees in a given year and to cover interest on the plan’s debt at the start of the same year—held stable or reduced by employer contributions.
    • Operating cash flow ratio—the amount by which benefit payments exceed contributions as a percentage of plan assets—above -5%.
    • Historical contribution volatility—the difference between highest and lowest employer contributions from 2008 to 2022—within plus or minus 3% of payroll.
  3. Employ risk-management policies that plan for economic and demographic uncertainty, as demonstrated by:
    • Use of stress testing tools to assess the effects of investment risk on plan balance sheets and government budgets—and public reporting of the results.
    • Normal cost sensitivity—expected volatility of employer costs for future benefits under a low return scenario—kept low through the use of risk-sharing features.
  4. Make benefit, funding, and investment policies, their implementation, and their performance fully transparent to all stakeholders, as demonstrated by:
    • Fee disclosures that reflect the returns net of fees—that is, adjusted to account for fees paid to investment managers.
    • Making investment policy statements—which outline objectives, risk parameters, and asset allocations—publicly available online.

Pew applied each metric to all 50 states but not necessarily to every retirement system within each state because of varying data availability and quality. Overall, however, these metrics cover approximately 90% of public retirement assets nationwide. See the methodological appendix for more information.

This brief provides more detail on this framework and then applies it to evaluate all 50 states to help identify states that are on a solid path and provide a roadmap for other states to improve their retirement systems.

Table 1

Which States Meet the Criteria of a Model Retirement System?

Framework implementation as measured by key metrics

Retirement security Fiscal sustainability Planning for
uncertainty 		Investment
transparency
Replacement
income ratio 		Savings
rate 		Net
amortization 		Operating
cash flow 		Historical
contribution volatility 		Risk
reporting 		Normal cost sensitivity Fee
disclosures 		Investment policy statement
AL No No Yes Yes No No High No Yes
AK No Partial Yes Yes No No Low Yes Yes
AZ Yes Yes Yes Yes No Yes Mid Yes Yes
AR Yes No Yes Yes Yes No High Partial Partial
CA Partial No Yes Yes No Yes High Yes Yes
CO No Yes Yes Yes No Yes Mid Yes Yes
CT Partial No Yes Yes No Yes Mid Yes Yes
DE Yes No Yes Yes No Yes High No Yes
FL No No Yes Yes No No High Yes Yes
GA Yes Partial Yes Yes No No Mid Partial Partial
HI Yes No Yes Yes No Yes High No Yes
ID Yes No Yes Yes Yes No Mid No Yes
IL Partial No No Yes No Yes High Yes Yes
IN No No Yes Yes No Yes Mid Yes Yes
IA Yes Yes Yes Yes No No Mid Yes Yes
KS No No Yes Yes No Yes Low Yes Yes
KY Partial No Yes Yes No No Low Partial Yes
LA No No Yes Yes No No High No Yes
ME Partial No Yes Yes No Yes Mid Yes Yes
MD Yes No Yes Yes No No Mid Yes Yes
MA No No Yes Yes No No High No Yes
MI No Yes Yes Yes No No Low Yes Yes
MN Yes No Yes Yes Yes Yes High Yes Yes
MS Yes No Yes Yes No Yes High No Yes
MO Yes No Yes Yes No Yes High Partial Yes
MT Yes Partial Yes Yes No Yes High Yes Yes
NE Yes Partial Yes Yes Yes No Mid Yes Yes
NV Yes No Yes Yes No No Mid No Yes
NH Yes No Yes Yes No No High Yes Yes
NJ Yes No Yes Yes No Yes High Yes No
NM Yes Yes No Yes No No Mid Yes Yes
NY Yes No Yes Yes No No Mid Partial Yes
NC Yes No Yes Yes No Yes Mid Yes Yes
ND Yes Partial Yes Yes No Yes Mid Yes No
OH No Partial Yes Yes No Yes High Yes Partial
OK Partial Partial Yes Yes No No Mid Partial Yes
OR Yes No Yes Yes No Yes Mid Yes Yes
PA Partial Yes Yes Yes No Yes Low Yes Yes
RI Yes No Yes Yes No No Low Yes Yes
SC Yes No Yes Yes No No High Yes Yes
SD Yes Yes Yes Yes Yes Yes Low Yes Yes
TN Yes Yes Yes Yes Yes No Low Yes Yes
TX Partial No Yes Yes No Yes Mid Partial Yes
UT No No Yes Yes No No Low No No
VT Yes No Yes Yes No No High Yes Yes
VA No No Yes Yes No Yes Mid Yes Yes
WA Partial No Yes Yes No Yes High Yes Yes
WV Yes No Yes Yes No No High Yes Partial
WI Yes Yes Yes Yes Yes Yes Low Yes Yes
WY Yes No Yes Yes No No High Yes Yes

Notes: Replacement income rate, the savings rate, and normal cost sensitivity data includes only 81 state retirement systems that cover teachers and state workers. The three fiscal sustainability metrics are based on aggregated data for all state retirement systems. The metrics under “investment transparency” include the nation’s 73 largest funds. “Partial” refers to instances in which at least one, but not all systems in a state meet the criteria. For normal cost sensitivity, “low” indicates that the system has built-in risk-sharing features, “mid” indicates a limited or partial distribution of risk, and “high” indicates that the system does not have a plan for sharing unexpected risk.

Source: Pew’s analysis of state public employee and teacher retirement systems