The Economic Burden of Pension Shortfalls: Evidence from House Prices

57 Pages Posted: 9 Mar 2021 Last revised: 19 Oct 2021

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

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.

Keywords: Public finance, pensions, deadweight loss, real estate.

JEL Classification: R3, H41, H55, H74

Suggested Citation

Aiello, Darren and Bernstein, Asaf and Kargar, Mahyar and Lewis, Ryan and Schwert, Michael, The Economic Burden of Pension Shortfalls: Evidence from House Prices (November 4, 2019). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=3757016 or http://dx.doi.org/10.2139/ssrn.3757016

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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