Investment Return Assumptions
Introduction
As of December 31, 2024, state and local government retirement systems held assets of approximately $6.2 trillion.1 These assets are held in trust and invested to pre-fund the cost of pension benefits. Because investment earnings account for a majority of public pension revenues, the investment return on these assets has an outsized effect on public pension plan funding levels and costs. A shortfall in long-term expected investment earnings must, over time, be made up by higher contributions, reduced benefits, or both.
Funding a pension benefit requires the use of predictions about future events, which are used to develop actuarial assumptions. Actuarial assumptions fall into one of two broad categories: demographic and economic. Demographic assumptions are those pertaining to a pension plan’s membership, such as changes in the number of working and retired plan participants; at what age participants will retire, and how long they’ll live after they retire. Economic assumptions pertain to such factors as the rate of plan participant wage growth and the future expected investment return on the fund’s assets.
As with other actuarial assumptions, projecting public pension fund investment returns requires a focus on the long-term. This brief discusses how investment return assumptions are established and evaluated, and recent trends and changes in assumed rates used by public pension plans.
Date Published
June 2025
Contact
Keith Brainard, Research Director
Alex Brown, Research Manager