Mississippi Takes an Important Step Toward Pension Sustainability
One of the worst-funded public pension plans in the nation is set for a major overhaul under a new law approved by Mississippi lawmakers during the state’s recently concluded legislative session. Starting Jan. 1, 2026, newly hired public workers in Mississippi will enroll in a “hybrid” retirement plan that combines elements of a traditional pension and a 401(k). This new plan design will help slow the growth of pension liabilities over time and reduce the risk of accumulating more pension debt in the future. In addition, approval of this important reform sets the stage for lawmakers to raise contributions to a level that will begin paying down the state’s $26 billion unfunded pension liability.
The Public Employees’ Retirement System (PERS) of Mississippi is a $34 billion statewide pension plan that provides retirement benefits to state and local government workers. The plan is significantly underfunded, with the ratio of assets to liabilities standing at just 56 percent. By comparison, the national average funded ratio for state and local pensions was 80 percent in 2024, including seven states with plan ratios that exceeded 100 percent.
The low funding level developed steadily over the past quarter-century as PERS liabilities grew faster than plan assets. For example, since 2000, asset values doubled from $16 billion to $33 billion while liabilities tripled from $18 billion to $60 billion. As a consequence of these persistent funding gaps, annual pension contributions have increased and now stand at 17.9 percent of payroll, with a gradual increase to 19.9 percent scheduled over the next four years. However, even these increases are less than what’s necessary to fund the system properly.
According to plan actuaries, employers should contribute 26 percent of payroll in order to adequately fund the benefits earned and pay down the debt over time. This amounts to hundreds of millions of additional taxpayer dollars needed to shore up the fund. Last year, lawmakers took a step toward chipping away at the shortfall by making a one-time $110 million supplemental payment and phasing in the employer contribution increase to 19.9 percent. Importantly, the bill changing the contribution rate also signaled the legislature’s intent to deal with the liability side of the equation by establishing a new benefit tier.
The benefit change came to fruition in 2025 when the legislature established, on a bipartisan basis, a new “hybrid” benefit tier that will apply to public employees hired after Jan. 1, 2026. Currently, public workers in Mississippi contribute 9 percent of their paycheck to fund a guaranteed monthly benefit during retirement, which is calculated based on salary and years of service. Employees are eligible to retire with a full benefit at age 60 or upon reaching 30 years of service, regardless of age. Finally, the plan pays a 3 percent annual increase intended to help offset the effect of inflation on the purchasing power of the monthly payment.
Under the new plan design established by House Bill 1, workers will contribute 4 percent of their paycheck to fund a guaranteed benefit that will be approximately half the size of the benefit provided by the current system. HB 1 also raises the retirement age for workers in the hybrid plan to 62 or upon reaching 35 years of service and does not provide a 3 percent annual increase. In addition, workers will contribute 5 percent of their paycheck to a 401(k)-style defined contribution plan where the funds can be invested and earn market returns.
This transition to a lower-cost benefit structure will reduce pension liabilities over time, which will eventually help improve funding levels. The smaller guaranteed benefit will also reduce the risk of accruing unfunded liabilities if future investment performance falls short of expectations. At the same time, the defined contribution savings portion of the benefit will provide greater portability and flexibility for shorter-term workers who do not spend their entire career in public service.
Locking in this reformed benefit structure is important because it is one of the few levers that policymakers can pull to impact plan liabilities. Public pension benefits enjoy strong legal protections, making it difficult to reduce near-term costs through adjustments to current worker or retiree benefits. That leaves contribution increases as the primary method of paying down previously accrued pension debt.
Considering that taxpayers already contribute $1.4 billion annually to fund employee pensions in Mississippi, it was important for lawmakers to demonstrate their commitment to limiting exposure to future unfunded pension liabilities before seeking additional taxpayer support to deal with existing debt. The hybrid plan established by HB 1 largely achieves this, and it should provide lawmakers with greater credibility as they pursue the difficult but necessary contribution increase that will help sustain PERS for years to come.