The State Pension Funding Gap: Plans Have Stabilized in Wake of Pandemic




Most analysts attribute the strong market performance to historically low interest rates and an unprecedented $5 trillion in federal stimulus in response to the pandemic. In addition, the economy is now recovering at a rapid pace, with recent projections by the Congressional Budget Office, Moody’s, and the Federal Reserve forecasting a return to pre-pandemic levels of gross domestic product by calendar year 2022 or before.3

However, the path to recovery remains uncertain, and the long-term forecast for economic growth and pension investment returns is less rosy. The Congressional Budget Office expects average real economic growth of 1.6% between 2026 and 2031 and nominal growth of 3.7% over the same time frame—significantly lower than the historical average.4 As such, market experts now estimate equity returns, which are related to economic growth and current market value of stocks, to be 6.4% over the long term, compared with 6.7% before the pandemic.5 And with interest rates currently lower than pre-pandemic levels, they also project bonds to yield just 2% over the next decade before returning to the pre-pandemic expected yield of about 4%.6

Author(s): Greg Mennis, David Draine

Publication Date: 14 Sept 2021

Publication Site: Pew Trusts