The Equable Institute's annual State of Pensions 2026 report finds that US state and local pension systems are in their strongest funded position since 2009, yet they still carry a sizable collective shortfall. Across all 50 states and Washington, the study examined 253 pension plans and reports that unfunded liabilities fell to $1.13 trillion from $1.37 trillion.
The report projects a national funded ratio of 85 percent for fiscal 2026, an improvement of 3.9 percentage points from last year's 81.2 percent. This marks the fourth consecutive year of improvement and the highest funding level since 2009.
Pension plans achieved an average return of 9.4 percent, exceeding the targeted 6.9 percent for the fourth consecutive year. During the review period, 45 states improved their positions and seven states' pension plans became fully funded or overfunded.
Why the improvement is not the whole story
Equable notes that favorable market returns and higher employer contributions underpin much of the progress. Employers now allocate on average $0.3183 of every dollar of wages toward pensions—more than three times the 2001 rate. However, only about $0.094 of that dollar goes to fund newly accruing benefits; the remainder is used to cover prior shortfalls.
Two structural risks highlighted
The report emphasizes two main structural risks facing public pension systems:
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Concentration of investments: Pension portfolios are becoming more similar as plans buy comparable assets and take positions in the same handful of large companies that dominate major equity indices. While rising markets lift most portfolios, a broad market downturn could simultaneously hit many plans.
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Valuation opacity: More than 27 percent of pension assets are held in instruments whose values are set by estimates rather than open-market prices. These typically include private equity and real estate investments, which are less transparent and therefore can mask true market exposure.
Growing direct exposure to AI
Equable also flags the growing concentration of pension fund holdings linked to artificial intelligence. The institute estimates that 8–10 percent of pension assets—roughly $513–$642 billion—are held in companies tied directly to the AI sector. Because of the opacity of private equity holdings, true exposure could be larger than reported.
Anthony Randazzo, executive director of the Equable Institute, stresses that today every state—intentionally or not—relies on AI-driven economic growth to help preserve its funding position.
Implications
Short-term improvements and stronger returns reduce immediate fiscal pressure, but the report warns that structural vulnerabilities could threaten long-term stability. Plans carrying large shares of illiquid, hard-to-value assets or concentrated positions in AI-sensitive companies are particularly exposed to a market shock.
The report is intended to map systemic risks and inform policymakers and regulators; it is not investment advice.
