The Economic Burden of Pension Shortfalls: Evidence from House Prices
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 pension shortfalls when it is the only form of immobile capital. We study the effect of pension shortfalls on real estate values at state borders, where labor and physical capital could more 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 near state borders by approximately two dollars. Our estimates imply a deadweight loss associated with addressing pension shortfalls that is consistent with prior research in settings with high returns to public spending and costs of taxation.
We thank Jeff Brown, Don Fullerton, Dan Garrett, Sean Myers, Taylor Nadauld, Robert Novy-Marx, Bill Schwert, Qiping Xu, Jinyuan Zhang; and seminar participants at 2019 Financial Research Association (FRA) conference, Red Rock Finance Conference 2021, SFS Cavalcade 2021, CU Boulder, Penn State, and UIUC for comments and suggestions. We are very grateful to Lina Lu, Matt Pritsker, and Andrei Zlate for sharing their data on the sensitivity of pension funds' liabilities to interest rate changes. We also thank the UCLA Ziman Center's Rosalinde and Arthur Gilbert Program in Real Estate, Finance, and Urban Economics for their generous support. The first version of this paper was circulated on November 4, 2019. All errors are our own responsibility. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.