Worst States for Retirement – An Update

Category: Best Retirement Towns and States

May 10, 2011 — Late last year our list of the “10 Worst Retirement States” caused a surprising uproar. Much excellent discussion came from it, and the experience gave us a new appreciation for the complexity of assigning factors to any “best” or “worst” list. Six months later, and with fresh data in from the Pew Center on the States, it seems like it’s time for an update. This article will list the states that are in the most fiscal trouble from the Pew Center’s viewpoint. In the second part of the article we will provide a recap of how these poor performing states stack up when it comes to taxes for retirees. We will not include any rating for weather/climate, as we did in last year’s list. Climate is so personal and so widely understood that we don’t feel the need to rate that factor for you.

The Pew Center recently published data on the unfunded liabilities of the states, The Widening Gap, for pensions and for promised future health care. The results are frightening, and carry broad implications that could affect your retirement if you live in one of these states (but more about that later). Although a few states are beginning to take action, the vast majority of states have chosen to ignore their looming pension problems. Many of them also have large deficits, which are equally as concerning. As we will see, most but not all of the states in trouble are low-tax states; some might argue that unwillingness to raise taxes has contributed to the mess some states are in. Here are some of the Pew Center’s findings:
As of Fiscal Year ’09 the states had a $660 billion

shortfall in the funding of their future pension obligations. Only 3 states had fully funded pension plans: New York, Washington, and Wisconsin. Listed below are the states with the lowest percentage funding for their pensions in FY 2009 (Note: the Pew Center says a healthy state should be 80% funded):

Illinois 51% funded
West Virginia 56%
Oklahoma 57%
Kentucky 58%
New Hampshire 58%
Rhode Island 59%
Louisiana 60%
Alaska 61%

Note: Partial data is available for FY 2010; it shows Connecticut as joining this list at 53%, while Kentucky and Louisiana’s conditions worsened to 54% and 56% respectively.

Health Care Funding – the Sleeping Giant
The states have about the same funding deficit when it comes to funding their promised

future health care benefits for retired employees – $31 billion is funded of their $635 billion obligation, leaving a shortfall of $604 billion. Only 7 states have funded at least 25% of their estimated future health care expenses (AK, AZ, ND, OH, OR, VA, WI). Note that Alaska is the only state on the list of low funded pension obligations that has substantially funded its future health care benefits.

Budget Deficits
Along with pension and health care underfunding, chronic budget deficits are another major issue that make a state an unfortunate choice for retirement. According to the Center for Budget and Policy Priorities, these are the states with the highest projected FY budget shortfalls, expressed as a percentage of their FY 2011 budgets:
IL 52%
NJ 37%
NV 37%
MS 28%
SC 26%
CA 26%
MN 25%
TX 22%
CT 22%
LA 21%

Future effects on retirees
The effects of these combined future liabilities is unclear. A few states are addressing the problem by reducing promised benefits to their workers, lowering future benefits, raising taxes, or increasing benefits funding. Without changes, a future reckoning could be severe. Services like transportation, Medicaid, education, social services, etc. might have to be cut. Unless slashing spending can solve the problem, taxes will have to be raised. Those actions in turn can cause ripple effects – like people and businesses leaving the state, unhappy civil servants, declining property values, unemployment, and citizen unrest. All of which raises the question for you – do you want to retire in a state that is going to face a fiscal reckoning?

Taxes on retirees and the Pew’s bottom 8 states
In this section we will examine the tax situation for the 8 states in the worst shape for funding their future retirement obligations. Some of the 8 are decidedly more tax-friendly to retirees, as you will see. Data source is the Tax Foundation.
Illinois – Does not tax pensions or social security. 10th highest state for property taxes. Income tax rate was raised to 5% in January, 2011 as a partial response to the crisis, as were business tax rates. Sales tax on high side at 6.25%. Note: Several large IL corporations including Sears threatened to move out of the State as a result of the tax hikes.

West Virginia – West Virginia is one of 14 states that tax social security income. Income tax has its highest bracket at 6.5% and ranks 19th highest among states that collect income tax. Sales tax is slightly above the national median at 6%. Property taxes are low – WV is ranked 44th highest state for per capita property taxes. No inheritance or estate tax.

Oklahoma – This state has a top income tax rate of 5.5%, which starts with incomes of $8,700. The sales tax is below average at 4.5%. Property taxes are among the lowest in the nation. Social security income is not taxed – good news for retirees.

Kentucky – The state’s highest income tax bracket of 6% kicks in at $75,000. The sales tax is also at 6%. Kentucky ranks 45th for property tax collections. Kentucky does not tax social security income.

New Hampshire – The Granite State has a reputation as a low tax state. The income tax is a flat 5% and is only based on interest and dividend income (so pension and social security income is not taxed). It is one of the few states with no sales tax. Property tax, is however, another story. NH is the 3rd highest state for per-capita property taxes paid.

Rhode Island – By any definition the Ocean State is a high-tax state for retirees. It is one of 5 that does not exempt any type of pension income, including social security, from taxation. The top income tax rate is 9.9%. Property tax paid per-capita is 7th highest in the nation. There is an estate tax. The sales tax is above average at 7%.

Louisiana – This is another very tax-friendly state for retirees. The overall tax burden rank is 42nd out of the 50 states. The top income tax rate is 6%, which begins with incomes over $50,000. Social security income is not taxed, nor are public or military pensions. A portion of private pensions is exempt. The sales tax is 4%. There is no inheritance or estate tax. Property taxes are very low and people over 65 can apply for an exemption.

Alaska – Alaska is the lowest tax state, thanks to its vast energy reserves. Not only is there no income or sales tax, but the state actually pays a stipend to each and every resident. On the other hand, AK has the highest cost of living of any state.

Bottom line
There are many good reasons for choosing or avoiding a particular state for retirement. Climate, recreational and cultural opportunities, infrastructure, and proximity to relatives and friends are among those. We also believe that the fiscal condition of a state and its taxation of retirees are important considerations when it comes to your future well-being. Any of the states on the Pew pension and benefit problems list above might have the will and the resources to correct those problems. But if they don’t, you should be prepared for trouble ahead.

For further reference:
Worst States for Weather and Natural Disasters
Best States for Retirement – 2011 Edition
Worst States for Retirement – 2010
Most Tax Friendly States for Retirement
State Guides to Retirement

What do you think?
Do you agree with this list? Any additions or subtractions? What do you think are the worst states for retirement? Use the Comments section below and let your fellow members know.

Posted by John Brady on May 10th, 2011

13 Comments »

  1. You need to keep up with the news. Illinois raised its income tax to a not-so-low 5% in January and they are talking about taxing pension income (although not enacted yet). Illinois is not tax-friendly and is likely to get less so for retirees in the future.
    Jeff: Thanks for the update. You are correct about the hike to 5%; corporate tax rates went up too.

    by Jeff — May 11, 2011

  2. I’ve lived in the far Northeastern sector of Illinois for 59 years. I had an illeostmy that put me in a nursing home for 23 months. I wasn’t ‘disabled’ in the strict sense of the word, and I ended up not having my own vehicle to get around. Illinois has a Transit program that is free to folks like me; additionally, they have a public transportation system that works quite well. Yeah, it takes paperwork and patience, but it does work. There are opportunities abundant to go to work and re-establish one’s self esteem. I moved to Wisconsin several months ago, and have not been able to find the same level of help as I did in Illinois. I have relatives that have moved down to Arkansas and things are, well, ok. Illinois is a great place to live in if you take the time to seek out the ‘nicer’ areas. As the saying goes, “That’s my story and I’m stickin’ to it”. Over and out.

    by Mndwlkr — May 11, 2011

  3. I live and work in Connecticut. We are right behind Illinois for defaulting on our unfunded pension and retirement obligations to state workers. Thanks to our idiots in the state government that just raised taxes again, we now hold the ranking of #1 for highest state taxes. Like most retirees, we will move out when we retire.

    by Joyce — May 11, 2011

  4. Just a couple of quick comments in relation to the financial end of ‘where to retire’. Interesting to also look at the deficeit situation states are in as a percentage of their budget. If they haven’t enacted ways to manage that, it will be coming. The other comment is on real estate tax rates. Although some places have relatively high rates you should not only compare the rates but also the cost of real estate and the associated valuations. In some areas the rate may be high but you may be able to get a lot more for a lot less than in other areas with similar high rates. Also, for retirees it is wise to look at any reductions or caps that states or local governments offer when it comes to real estate taxes. They are out there and can make a big difference. Happy looking.

    by Mejask — May 11, 2011

  5. After living away from my home state of Rhode Island for 30 years I dreamed of going home to retire. It does not look like that will ever happen based on the information given about Rhode Island taxing my retirement and social security. I can barely afford to live now and it seems trying to move back would be impossible. This is heartbreaking.

    by Paul — May 11, 2011

  6. Paul – Rhode Island has become a disaster. The talk now is for taxing heating oil, coffins (yes, I did say coffins), services such as hair cuts, mechanical work done on your car and a variety of others. Pretty much anything that’s not taxed now soon will be. Businesses aren’t moving to RI – they’re moving out as are the people because the taxes are so high. I grew up in RI but the tax load is so horrific it’s not worth moving back there.

    by Kathy — May 11, 2011

  7. I grew up, worked and am now retired in (downstate) Illinois. It’s a great place to live as long as you hold your nose and ignore the stench of politics, underfunding of services, and looming meltdown when the fat cats in Springfield and Chicago can no longer play the fiscal shell game that has been going on for a long, long time.

    by RJ in IL — May 11, 2011

  8. This is a good list but I don’t know why you didn’t add in weather here. I think weather is a very important factor, especially when you are talking about retired people who may have achy joints are a difficult time getting around on wet/iced surfaces. Although people may differ slightly in what types of weather they “prefer,” not many people enjoy extreme temperatures, hot and cold. There is a reason why a lot of retirees move to Florida and Arizona, and it aint the taxes. I’m actually only 30 years old but I’m already looking forward to where I may retire.

    by Chris Barber — May 17, 2011

  9. Chris, you are correct. For many years, climate was the #1 factor in choosing a place to retire. It has recently been supplanted by cost of living, but it’s still always near the top of the list.

    Jan Cullinane, The New Retirement: The Ultimate Guide to the Rest of Your Life (Rodale)

    by Jan Cullinane, co-author The New Retirement: The Ultimate Guide to the Rest of Your LIfe (Rodale 2007) — May 18, 2011

  10. somehow, California didn’t make it into the worst list here? interesting.

    Comment from John Brady: Good comment, Vernonw. We went back in and looked for states with the biggest FY 12 budget deficits as a percentage of their FY 11 budgets. Most of the same states showed up on the list, but California was 6th on the list at 26%. SC and TX also showed up the top 10 deficit states according to the Center for Budget and Policy Priorities.

    by Vernonw — May 20, 2011

  11. Ct. is in the process ( agreement made but not yet ratified) of adressing pension & health care short fall. Is it enough? time will tell.

    by Fred Lucia — May 20, 2011

  12. Ohio “the heart of it all” taxes EVERYTHING! Sales tax of minimum 6% and up on all services such as lawn mowing, dry cleaning, and even delivery of heating oil which adds about $20 – $25/month to utilities. Yet it’s still not enough to close that $8 Bil deficit the OH state government doesn’t talk about.

    by Stew — May 23, 2011

  13. […] Retire in a Different State” “The Tax Friendliest States for Retirement” “Worst States for Retirement – Updated“ Posted by John Brady on June 21st, 2011 Comments (0)  Email This Post Entries (RSS) […]

    by » Why Becoming a Florida Resident Might Be a Good Retirement Move – And How to Do It Topretirements — June 21, 2011

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