"A Stealth Mortgage On Your House" - The Reality Of The Looming Pension Crisis

Authored by John Rubino via DollarCollapse.com,

Money manager Rob Arnott and finance professor Lisa Meulbroek have run the numbers on underfunded pension plans and come up with an interesting – and highly concerning – new angle: That they impose a “stealth mortgage” on homeowners. Here’s how the Wall Street Journal reported it today:

The Stealth Pension Mortgage on Your House

Most cities, counties and states have committed taxpayers to significant future unfunded spending. This mostly takes the form of pension and postretirement health-care obligations for public employees, a burden that averages $75,000 per household but exceeds $100,000 per household in some states. Many states protect public pensions in their constitutions, meaning they cannot be renegotiated. Future pension obligations simply must be paid, either through higher taxes or cuts to public services.

Is there a way out for taxpayers in states that are deep in the red? Milton Friedman famously observed that the only thing more mobile than the wealthy is their capital. Some residents may hope that they can avoid the pension crash by decamping to a more fiscally sound state.

But this escape may be illusory. State taxes are collected on four economic activities: consumption (sales tax), labor and investment (income tax) and real-estate ownership (property tax). The affluent can escape sales and income taxes by moving to a new state—but real estate stays behind. Property values must ultimately support the obligations that politicians have promised, even if those obligations aren’t properly funded, because real estate is the only source of state and local revenue that can’t pick up and move elsewhere. Whether or not unfunded obligations are paid with property taxes, it’s the property that backs the obligations in the end.

When property owners choose to sell and become tax refugees, they pass along the burden to the next owner. And buyers of properties in troubled states will demand lower prices if they expect property taxes to increase.

It doesn’t matter if we own or rent; landlords pass higher taxes on to tenants. Nor does it matter if properties are mortgaged to the hilt or owned outright. In time, unfunded pension obligations will be reflected in real-estate prices, if they aren’t already. A state’s unfunded liabilities are effectively a stealth mortgage on private property. Think you can pass your property on to your heirs? Only net of the unfunded pension obligations.

We calculated the ratio of unfunded pension obligations relative to property values in each state. We used 3% bond-market yields as our discount rate to measure unfunded obligations, because while other assets ostensibly earn a risk premium above the bond yield, these assets can also underperform.

Unfunded pension obligations range from a low of $30,000 per household of four in Tennessee to a high of $180,000 per household in Alaska. They amount to less than 11% of the average home values in Florida, Tennessee and Utah and more than 50% in Alaska, Mississippi and Ohio.

There are a few surprises. California, Hawaii and New York have large unfunded obligations, but because property in these states is so expensive, the average household burden is less than 15% of the average home price. Meanwhile, West Virginia and Iowa have relatively low pension debts—but the average household obligation is more than 30% of the average home price because property is far less expensive in these states.

On average nationwide, unfunded state and local pension burdens represent 20% of real-estate values. This ratio can rival or exceed an owner’s home equity, depending on the size of his mortgage. If real-estate prices adjust to reflect unfunded pension obligations, many homeowners’ equity could be at risk. As we’ve seen in Detroit, the public pension stealth mortgage can ultimately devastate the housing market.

This is yet another confirmation that we’re not nearly as rich as we think we are. If your home is your biggest asset but a big part of your equity is secretly claimed by the local government, you don’t really own it. And if you’re counting on a public sector pension and home equity to finance your retirement you might be hit with a double whammy when your pension is cut (despite what the state constitution says, it will be cut one way or another) at the same time your property tax bill soars to protect what’s left of pension benefits.

And the pension crisis is actually much worse than Arnott’s and Meulbroek’s research implies, because they’re using peak-of-the-cycle numbers. When the next recession brings an equities bear market, pension plans will lose money, causing their underfunding to explode. So that 20% stealth mortgage is about to get even bigger.


Juggernaut x2 Tue, 08/07/2018 - 09:50 Permalink

Govt employees and .gov retirees are about the only middle class left in the US- if everybody else has to support that lifestyle then it has been decided that we will have to.

Free This toady Tue, 08/07/2018 - 10:20 Permalink

Does that mean my house can't be detected by radar? Great! I like this under the radar thingy.

No? You mean I am actually poor? Marvelous!

Thank God I don't have a pension to worry about, carry on. Will be homeless in no time.

Nothing new under the sun.

In reply to by toady

Totally_Disill… Free This Tue, 08/07/2018 - 10:27 Permalink

I realized that if I wanted to retire in the current economy and mismanagement of public employee costs and state budgets I needed to sell my home, take the equity and relocate to a lower cost of living state.  One of the top criteria for my destination state was their unfunded public pension liabilities.  There are few states that rank lowest to zero and I moved to one that that has one of the lowest at less than 1/2 Million.  In MA the commonwealth constitution had been amended to provide real estate tax assessment to cover the unfunded public pension liabilities INCLUDING state budget deficits.  Folks, its a no brainer to sell and leave these liabilities to the sheeple who are unaware of the fiscal tsunami headed their way.

In reply to by Free This

Gatto Buck Johnson Tue, 08/07/2018 - 12:39 Permalink

I sold all of my real estate earlier this year at the top of the housing bubble!   Just received a new property tax statement from one of the houses I sold, they literally increased the taxable value of that house THREE TIMES sending the taxes on it soaring!   Man, did I get out at the right time!   You had better sale BEFORE the public becomes aware of this information too, because then the values will drop and the % of the tax must rise!   Not sure how that will work because some places cap the increase in the properties value to 10% a year and cap the amount the tax can increase, so the pain IS COMING!   If you wait until everyone is heading for the exits, you will have a bad time!   Glad I got out and took advantage of Puerto Rico's Act 22, now my tax rate is 0%!

In reply to by Buck Johnson

Shift For Brains Totally_Disill… Tue, 08/07/2018 - 13:13 Permalink

In Texas, if you are over 65 or disabled, you can defer property taxes for life and then the life of your surviving spouse. That  means ZERO property or school taxes, no MUD or other taxes on your property while you are living in your home. The current interest on the unpaid tax owed is a simple 5% per year. What makes sense to me is defer the tax, stay healthy and outlast the life of the System. A lot of this is going to be resolved one way or the other in the next 10 years or so. Just like no one wants to be the last soldier to die in a war, why be the last person to pay taxes that ultimately are forgiven...or paying into a System that collapses and makes collection impossible?

There is a real, tangible time value in being able to wait a while and not pay legally, to see how things sort themselves out. In the meantime, keep the money for yourself, starve the Beast and enjoy a two-fer.


In reply to by Totally_Disill…

blindfaith Shift For Brains Tue, 08/07/2018 - 13:53 Permalink

You don't really believe that you have been given a free pass do you?  Unless that is a Texas Constitutional amendment, it can change anytime.

What all of us don't understand is that every municipal government agency, local, state, national, is a CORPORATION.  Texas Inc, Dallas Inc, New York INC. Miami INC, The FED Inc, DOJ Inc, you name it every agency in the USA INC.  That means the 'office holders' as in any corporation can make obligations on the taxpayer stockholder/bondholder without permission by the mere stroke of a pen.  Think about that the next time you ask yourself, "how did this get passes and I didn't know about it?".

This has been in effect since 1933, and none of us know about it .


In reply to by Shift For Brains

Totally_Disill… toady Tue, 08/07/2018 - 10:43 Permalink

@toady - sounds like false bravado my friend.  Remember we are a land of laws and they can be used to evict you from your home should you not pay your real estate taxes..."Once the property taxes are delinquent for a sufficiently long time, the taxing authority will initiate a tax sale."  At that point state law enforcement assists in the seizure.  I guess you can sit inside with a firearm, but you will lose.  Educate yourself before shooting your mouth off...


In reply to by toady

toady Totally_Disill… Tue, 08/07/2018 - 11:14 Permalink

Oh no, I understand the law and all that stuff.

I'm just too old and tired at this point. If they do end up coming for me, well, I just hope I can take a few with me.

I have considered the whole "burn it to the ground" thing.... I suppose if I have a place to go I'll do it and move on, but I'll be damned if I'll be living in a tent or pushing around a shopping cart after 60.

Better to go out in a blaze of glory.

In reply to by Totally_Disill…

Snaffew Totally_Disill… Tue, 08/07/2018 - 12:15 Permalink

when the 2009 crisis hit, I remember many overleveraged homeowners defaulted on their homes, were going through the process of foreclosure, but continued to live in these homes tax and mortgage free for up to 5 years before the banks finally closed the deal and got them out.  Florida was a big culprit in that situation.  Buy a huge McMansion and stop paying your mortgage and taxes---You should be able to live for free for quite a while before they evict you.  Just remember to hide your other assets and work a cash paying job---restaurant, construction, etc.  That's probably a$150k savings  over 5 years with a $1900.00 mortgage and $7k/yr in taxes.  That's the best way to stick it to the banks and the gov't.

In reply to by Totally_Disill…

Blankenstein Totally_Disill… Tue, 08/07/2018 - 16:18 Permalink

Well, if they raise property taxes enough and also begin to seize homes, they will kill the entire state's economy.  The few receiving the fat pensions won't be able to make up for the loss of spending of the majority of taxpayers.  

Jobs will be lost and businesses will close or move.  There is only so much blood you can get from a turnip and states like Illinois are almost there.  

On top of that, a number of the state gooberment workers move as soon as they retire and leave the burden to the current residents.  

It is a Ponzi scheme that will collapse.  The residents just don't have enough money to make the system whole, and the stock market and bond markets will not meet the fantasy returns that all the dum-dum politicians counted on.  

In reply to by Totally_Disill…

skeelos nightshiftsucks Tue, 08/07/2018 - 12:07 Permalink


The elected politicians will raise taxes until they piss of too many people and then they will be hung from lamp post.


Where did you ever get the notion that it will be done by elected officials?

We've already seen the state of Illinois go to court to get relief from their pension obligations because it will bankrupt the state, only to have the judge rule in favor of the pensions.

Confiscation will be mandated by a court which will be eventually upheld by the Supremes.  When it gets to that point, the only way to defeat it will be in essence civil war.  Will people in Ohio for example, rise up in armed conflict because of a Supreme Court decision that only directly affects property taxes in a case in Illinois?

If it is done piecemeal, city by city, state by state, it will be a long time if ever, before anyone is swinging from a lamp post over property taxes to fund pensions.


In reply to by nightshiftsucks

presk_eel_pundit skeelos Tue, 08/07/2018 - 16:17 Permalink

Excuse my ignorance, but if pension obligations are mandated by a state's constitution, can't the constitution be changed at any time by a vote of the people?


Also, the article states that pension obligations led to the drop in Detroit real estate prices. The opposite is true. People have been exiting Detroit for the suburbs since the 50s. The drop in population from nearly 2 million down to 700,000 led to a drop in housing prices and ultimately Detroit's bankruptcy.

In reply to by skeelos

Totally_Disill… JohninMK Tue, 08/07/2018 - 10:36 Permalink

@JohninMK - check your state.  The top five states are currently carrying unfunded balances that exceed SIX TRILLION - over one Trillion for each state!  And, all states have adopted mechanisms to address the unfunded liability is the shortfall between retirement benefits that governments have promised their state and municipal workers and the current funding available to meet those obligations.  Although states are trying to address the overpromised retirement benefits, the problem is just like govt and consumer debt - record high and likely unpayable.  You do the math smartass...

In reply to by JohninMK

chubbar Adolfsteinbergovitch Tue, 08/07/2018 - 10:13 Permalink

OK, here's the statement: " A state’s unfunded liabilities are effectively a stealth mortgage on private property. Think you can pass your property on to your heirs? Only net of the unfunded pension obligations."

Please explain the mechanism for the state to collect this "stealth mortgage"? You can't just make a statement without an explanation of how this will work. For the state to collect 20% of the sale of your house they either have to pass a law or increase the property taxes. Both can be done of course, but neither would be easy and certainly not without large scale public dissent once it was realized WHY it was being done.


In reply to by Adolfsteinbergovitch

BarkingCat chubbar Tue, 08/07/2018 - 10:39 Permalink

There comes a point where people will simply walk away from their property. 

Look at Detroit.

I knew someone who in the 1980s had a house that was purchased at about $100k.

Few years later it was worth about $170-$180k.

The property taxes skyrocketed to somewhere around $4K.

I remember that he was complaining that he was paying about 5% in property taxes of what he paid for the house. Another thing I remember him saying was that it is getting close to the point where he might just burn down the place. He was not taking about insurance fraud. Simply torching the place to walk away from it so that the government cannot sell it.

.....and he paid cash for the place so he would have been losing his $100K investment. 

In reply to by chubbar

chubbar Graph Tue, 08/07/2018 - 11:40 Permalink

Yes, many lost their homes, many stayed in the home without paying, some were let off the mortgage hook because of MERS lawsuits, etc.

What works with a minority doesn't work with the majority. The banks won't have the luxury of holding homes off the market while the FED pumps trillions into the economy next time. Property taxes go down if the valuation goes down, unless they jack the mill rates, which they will try to do. Watch what happens when the majority of the town/city residents show up at a town hall meeting and tell the selectmen to shove that tax hike up their asses. What is coming is wholesale destruction of asset prices which underpin the under funded pensions.

So, not only is the 2% return/yr of pension funds going to be an issue but the tanking valuations that the pension funds invested into will be an even bigger issue. When there is widespread asset price destruction, it brings down the whole economic system. I don't think we really understand what is coming our way. It's financially impossible to pay gov't employees what they were promised. The average family doesn't have the extra money to pay for these obligations.

Yes, they can raise taxes here and there, but the system will fail. You can't tax 50% of homeowners out of their homes in order to pay gov't workers a pension that is multiples above what is paid in private industry and continue to expect society to function.

In reply to by Graph

NickelthroweR chubbar Tue, 08/07/2018 - 11:33 Permalink


At the end of the Roman Empire, taxes became so onerous that people willingly sold themselves into slavery so as to make themselves exempt from the taxes.  Yeah, slavery was preferable to the demands of government.  I expect to see the same again.  After all, the FSA will have to sell ass in order to survive and the middle class wont have anything left to take but will still be responsible for funding everything.  Bring back the peasants.

In reply to by chubbar