Sensitivity Analysis

Discount Rate and Market-Value Analysis Overview

This discount-rate analysis estimates how much states would need to contribute if they were to pay down their unfunded pension liabilities over a 20-year amortization horizon using more conservative return assumptions. Because the discount rate is the assumed long-term investment return, lowering it raises the measured size of liabilities and accelerates the pace at which states must contribute to eliminate the unfunded gap. In addition to these actuarial stress tests, the analysis includes a market-value benchmark that re-measures liabilities using duration-matched U.S. Treasury yields.

This analysis attributes the full contribution adjustment implied by alternative valuation scenarios to state and local employer contributions rather than to employee (member) contribution rates. This reflects both the budgetary incidence of pension costs and the institutional arrangement of public retirement systems. Employee contribution rates are typically fixed in statute or collective bargaining agreements and are therefore legally and politically difficult to change for existing workers, while employer contribution rates are explicitly designed to adjust in response to actuarial experience and funding requirements. Consistent with this reality, the majority of historical funding increases have been absorbed on the employer or state side, which accounts for roughly three-quarters of total contributions nationally for the retirement systems studied in this analysis. As a result, the contribution increases shown here represent the additional fiscal pressure placed on state and local education budgets under alternative discount-rate and market-value assumptions.

Current vs. Actuarial Stress Scenarios

Under current investment return assumptions, pension contributions should account for 11.06% of associated education expenditures, slightly above the actual 2023 share of 10.57%. If investment returns fall 2 percentage points below those assumptions, the required contribution share increases to 19.26%, or an 8.69 percentage-point increase relative to actual 2023 contributions, equivalent to an 82% increase in the share of education expenditures devoted to pensions. This represents tens of billions in additional annual dollars that would need to be redirected from instructional spending toward closing legacy unfunded liabilities within two decades.

Market-Value (Treasury) Benchmark

Under the market-value scenario, pension liabilities are re-valued using duration-matched U.S. Treasury yields rather than assumed investment returns. When these re-measured liabilities are amortized over the same 20-year horizon, required annual pension contributions rise further, reaching approximately $167.5 billion nationally, or roughly 22.95% of associated education expenditures.

This benchmark illustrates how sensitive reported pension affordability is to valuation assumptions and is presented for comparison purposes rather than as a policy recommendation.

What the 20-Year Horizon Means

• The analysis assumes states amortize their unfunded liabilities over 20 years, rather than indefinitely or using rolling amortization.
• A lower discount rate increases the present value of promised benefits, creating a larger unfunded liability to pay down.
• To eliminate this gap within 20 years, annual contributions must rise substantially, placing pressure on education budgets.
• In the market-value scenario, liabilities are first re-measured using Treasury yields and then amortized over the same 20-year period, allowing for direct comparison with actuarial scenarios.

Key National Findings (2023)