How Will Longer Lifespans Affect State and Local Pension Funding?

Americans’ longer lifespans, while welcome from a human perspective, also present state and local pension plans with new funding challenges. Increased longevity makes defined benefit pension plans more expensive as sponsors must pay benefits to retirees for a longer period of time.

This brief examines the impact that incorporating longevity improvements into their cost estimates would have on the funded status of state and local defined benefit plans. It explores what public plan liabilities and funded ratios would look like under two alternative scenarios: 1) if public plans were required to use the new mortality table designed for private sector plans, and 2) if public plans were required to go one step further and fully incorporate expected future mortality improvements. Key findings include:

• Using the private sector standard, public plans underestimate life expectancy by only 0.5 years, reducing the 2013 funded status of state and local plans from 73 to 72 percent;
• Incorporating future mortality improvements would increase life expectancy by 2.3 years and reduce the funded ratio of public plans from 73 to 67 percent; and
• Public sector plans appear to be making a serious effort to keep their life expectancy assumptions up to date.