The defined benefit plans that provide retirement income for five million state and local employees who do not pay into Social Security are better off now than they were prior to the pandemic, despite dire predictions that economic fallout from Covid-19 would decimate them, according to the Center for Retirement Research at Boston College.

The fear in March 2020 was that a prolonged pandemic recession, with poor investment returns and shortfalls in government revenue, would erode the capacity of these plans to live up to their commitments to employees who might have no other source of retirement income, stated a recent CRR brief written by Jean-Pierre Aubry and Kevin Wandrei, the associate and assistant directors, respectively, of state and local research.

“But that has not come to pass,” Wandrei said in an interview. “The impact of the pandemic on these public pensions has not been negative at all.”

Instead, Aubry and Wandrei found that the two key factors that contribute to the financial health of public plans—investment returns on pension fund assets and contributions from government sponsors—both held up their end surprisingly well.

“After the initial steep drop in the stock market in the spring of 2020, the market roared back,” they wrote. “As a result … [these plans] exceeded their return targets by over 20 percentage points on average. In fact, many plans cited 2021 as one of the best years of investment returns on record.”

Similarly, tax revenues rebounded from a drop in income taxes during the second quarter of 2020 as stimulus checks, unemployment benefits and the Payroll Protection Program flowed into communities, the brief said.

And then there were the billions of dollars in federal aid: “Although the aid came with restrictions that ostensibly prohibited its use for bolstering pensions, money is fungible,” Aubry and Wandrei wrote. “And anecdotal evidence suggests that states have contributed more to pensions than they otherwise would have.”

The result has been that this category of defined benefit plan, which in recent years has experienced negative cash flows on average of about 2% of assets annually, saw the average funded ratio (which is the current assets over the calculated present value of future benefits) improve by almost 2% in 2021.

State and local defined benefit plans where employees are excluded from Social Security (called “noncovered” plans) can be found in 19 states, and include teachers and public safety workers in addition to general public employees, the brief stated. These plans are obligated to pay out benefits that are equal to or greater than Social Security.

The largest of these plans is the Texas Teachers Retirement System, which has more than 1.4 million members. The smallest plans include Atlanta Fire, Fairfax County Police and Pittsburgh Police, each of which has fewer than 3,000 members, the paper said. Of California Public Employees Retirement System’s 2 million members, about 65% are noncovered.

While there was no immediate impact of the pandemic on noncovered defined benefit plans, they still face the challenges they faced before the pandemic, which include that 2% negative cash flow and dependence on achieving aggressive investment targets that historically have been missed by about 1% annually since 2001.

“What’s the likelihood these plans will literally run out of money in the next 10 years? That’s not going to happen,” Wandrei said. “But [long term], the funded ratios are not amazing. They’re hovering around 70%.”