U.S. public pension systems continue to face significant funding pressure, with estimated unfunded liabilities between $1.3 trillion and $1.5 trillion and average funded ratios remaining below long-term resilience thresholds.
To meet long-term obligations, many pensions still rely on assumed annual returns near 6.9%. However, with bond yields and public market return expectations under pressure, traditional stock-and-bond portfolios may struggle to fully close the funding gap.
This dynamic has contributed to a major allocation shift over the past two decades. Public pension systems have increased exposure to alternative investments, including private equity, real estate, hedge funds, and real assets, as they seek additional sources of return and diversification. According to the paper, alternatives allocations increased from approximately 9% in 2001 to roughly 30% by 2023.
The paper also highlights growing structural pressures within pension systems, including negative cash flows and increased exposure to illiquid assets. Under recession stress scenarios, unfunded liabilities could expand materially beyond current estimates.