A record 4.1 million Americans hit the “peak” retirement age of 65 in 2024. This marks the largest surge of Americans turning 65 in the nation’s history, a trend expected to continue through at least 2027.
Retirement plans must be well-managed to successfully serve new retirees, and that’s no easy feat. In addition to providing retirement security for workers, state and local retirement systems strive to ensure the cost of benefits remains stable and sustainable long term. Market volatility and fluctuating economic conditions complicate these goals. Although policy reforms and increased financial contributions have boosted the cash flow of many retirement systems, only a few states have been able to consistently meet these goals.
In a recent publication, Pew reviewed all 50 states using the key features of model public retirement systems based on more than a decade of research. Regardless of how benefits are designed, the most successful systems share four main practices: retirement security; fiscal sustainability; planning for uncertainty; and investment transparency.
Ensuring security: The first practice highlighted in Pew’s research is offering benefits that put workers on a path to financial security in their retirement. The most successful plans typically replace at least 90% of a worker’s preretirement income. Pew also noted that leading systems allow public workers to save at least 10% of their annual salary for retirement (or 18% for those without Social Security benefits).
Aiming for sustainability: Pew says fiscal sustainability is the second core practice of model retirement systems. The most successful state plans can pay long-term debts, meet all other financial obligations, and have sufficient employee and/or employer contribution levels. Sustainable funding ensures that pension costs are predictable and affordable, even during periods of economic uncertainty.
Planning for uncertainty: Implementing a plan for economic and demographic uncertainty is another core practice of successful retirement systems. Standout states utilize risk reporting tools to determine the impact of investment risk on pension plans and government budgets. Additionally, Pew found that plans with risk sharing features had lower employer cost volatility (the cost for future benefits if investment returns are lower than expected), whereas states without risk sharing—and states with partial risk sharing features—had medium- to high-cost volatility.
Boosting transparency: The last practice Pew highlights is making investment policies fully transparent. In model retirement systems, investment policy statements are publicly accessible to all stakeholders. These plans also disclose the amount of money an investment earns after deducting fees paid to investment managers, which helps states accurately evaluate investment returns.
Throughout 2024, several states introduced or passed legislation reflecting the core practices identified in Pew’s research. For example, in an effort to enhance the fiscal sustainability of the state retirement system, Hawaii enacted a bill (SB 3070) reducing the maximum funding period limit (to amortize total unfunded liabilities) from 30 years to 20, lowering the future costs of the retirement plan. Rhode Island introduced a measure (SB 2865) earlier this year that requires benefit changes resulting in increased plan costs to be amortized over new five-year closed periods. If successful, this bill would guarantee the timely repayment of new unfunded liabilities while ensuring that plan funds are sufficient to cover current benefits.
When it comes to planning for uncertainty, half of all states already use risk reporting tools such as stress testing, including Hawaii and Pennsylvania. Rhode Island maintains risk-sharing features in its cost-of-living adjustment, or COLA, that modify the rate based on the funded status of the plan. In 2022, Georgia also created a cost-sharing COLA that determines annual adjustments contingent on investment returns and the system’s funded ratio.
State legislatures have also shown increased interest in investment transparency in pension plan governance. For example, although it’s currently postponed, legislation introduced in Pennsylvania in 2023 (HB 1261) would require reports on investment performance and expenses of the fund be made publicly available to all shareholders. Similarly, Louisiana passed a bill (HR 267) this year urging retirement systems to submit reports on proxy voting decisions for the previous year. Illinois introduced a bill on the divestment of pension assets that also contains provisions related to investment transparency. While the measure (SB 3717) is currently pending, it would require all pension systems in the state to post information on public market holdings and private equity investments on a publicly accessibly website.
With more than 4 million Americans turning 65 each year through 2027, NCSL anticipates that state legislatures in the year ahead will continue introducing legislation aiming to improve the design and management of their retirement systems. The core features identified in Pew’s research provide a framework of best practices for states to boost transparency, maintain fiscal sustainability and provide workers with a clear path to retirement security.
Click here to read Pew’s issue brief and learn more about its research on model retirement systems. Click here to access NCSL’s 2024 public pension database.
Angela Rowe is a policy specialist in NCSL’s Employment, Labor and Retirement Program.