Wednesday, March 1, 2017

Should you move from Connecticut to Wisconsin?

To figure out how much to save to pay off current and future retirees, public pension defined benefits plans discount future expected liabilities at 7.5-8.5%.  If they earn that much on their investments, then they will have enough to pay the retirees.  However, this year, their investments earned only 6.8%, the lowest since 2016.

On average, pension under-funding is close to 50%.  So pension fund managers have tried to earn more by investing in
... riskier, less traditional investments over the past decade. Large public pension plans had a median 11.47% of their assets in alternative investments such as private equity for the year ended June 30 and a median 4.45% of their investments in real estate.

One good solution is Wisconsin's, to turn the defined benefits plan (paying a guaranteed amount) into a defined contribution play (paying an amount that depends on how well investments do).

However, many states, like Connecticut, are leaving this problems to future generations.  The public employees union reached agreement with the governor to ignore the problem until 2046. By that time, the fund will have fewer assets generating income which makes higher taxes, reduced state services, and pension cuts more likely.

And if residents anticipate these changes, they will migrate to states like Wisconsin that don't have these problems.  If so, this may drive down the value of real estate in CT to compensate residents for living in the state.  In equilibrium a mobile asset (people) has to be indifferent about where it is used; otherwise, it will move.

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