The Perceived Cost of Pension Short (Wind)falls

Abstract

U.S. state pensions are underfunded by trillions of dollars, but their economic burden is unclear. In a model of inefficient taxation, real estate fully reflects the cost of these shortfalls when it is the only form of immobile capital. Thus, we study the effect of pension shortfalls on real estate values at state borders, where labor and physical capital can easily relocate to a state with a smaller shortfall. Using plausibly exogenous variation driven by pension asset returns, we find that one dollar of pension underfunding reduces house prices by approximately two dollars. Controlling for county-level rental rates as a proxy for current housing consumption does not affect our estimates, which suggests that house prices are affected by future costs rather than the current quality of public services. Our estimates imply a deadweight loss associated with addressing pension shortfalls that is consistent with prior research on the costs of public spending and taxation.