The Perceived Cost of Pension Short(Wind)falls

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See all articles by Darren Aiello

Darren Aiello

Brigham Young University - Marriott School

Asaf Bernstein

University of Colorado at Boulder; National Bureau of Economic Research (NBER)

Mahyar Kargar

University of Illinois at Urbana-Champaign - Department of Finance

Ryan Lewis

University of Colorado, Boulder

Michael Schwert

University of Pennsylvania - The Wharton School

Date Written: November 4, 2019

Abstract

State pensions are underfunded by trillions of dollars, making these deficits larger than all other household non-mortgage liabilities combined, but their temporally distant and uncertain nature make the current burden of such shortfalls unclear. We quantify the incidence of state pension short(wind)falls using a design that i) compares house purchase decisions across state borders where households can choose varying exposure to pension underfunding, and ii) plausibly exogenous returns on pension assets. Consistent with a model of inefficient taxation, we find that a dollar of pension windfalls generates one to two dollars of housing wealth. These findings are not driven by differential property characteristics, even holding within just repeat sales, nor proxies for coincident economic conditions. In fact, the finding that the inclusion of controls for current housing consumption, as proxied by rental rates, do not substantially alter our estimates, suggest that price effects are likely driven by future costs, consistent with the expected timing for the burden of such shortfalls.

Keywords: Pensions, Funding, Capitalization, House Prices

JEL Classification: R3, H41, H55, H74

Suggested Citation

Aiello, Darren and Bernstein, Asaf and Kargar, Mahyar and Lewis, Ryan and Schwert, Michael, The Perceived Cost of Pension Short(Wind)falls (November 4, 2019). Available at SSRN: https://ssrn.com/abstract=

Darren Aiello (Contact Author)

Brigham Young University - Marriott School ( email )

United States

HOME PAGE: http://darrenaiello.com

Asaf Bernstein

University of Colorado at Boulder ( email )

Campus Box 419
Boulder, CO 80309
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mahyar Kargar

University of Illinois at Urbana-Champaign - Department of Finance ( email )

Champaign, IL 61820
United States

HOME PAGE: http://mahyarkargar.com

Ryan Lewis

University of Colorado, Boulder ( email )

Boulder, CO 80309-0419
United States

Michael Schwert

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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