The Perceived Cost of Pension Short(Wind)falls
40 Pages Posted:
Date Written: November 4, 2019
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: Suggested Citation