When Will the Retirement Migration End?
By Bryan Kuderna, CFP®, RICP®, LUTCF ~
New Jersey has become a case study for financial disaster (forgive the cynical language, but you try to define the NJ balance sheet and budget in one word). By now you probably feel like it’s the same old story, but we are actually in the first chapter, perhaps even the prologue of this novel. Baby boomers are only beginning to contemplate if they’re ready to retire, and as a Certified Financial Planner to much of this generation, I can attest to the discussion of NJ evacuation in every retirement plan. Each client has his or her own reason for fleeing the state, and the destinations vary. However, one state has surpassed the rest in welcoming these refugees, so much so we call it “God’s Waiting Room”.
Let’s begin by examining the two most common financial reasons for exodus from the Soprano state…
- Income Taxes– Florida has none. NJ can top out at 11.8% for the wealthiest of residents. This led to over $15.2 of revenue to the state in 2018.
- Property Taxes– Florida taxes on average .97% of a property’s assessed value, whereas NJ taxes 1.89% of assessed value (worst in the nation). Combine this with much cheaper homes and you have an instant savings.
So where does Florida get the money for such nice things? 59% of state general revenue comes from sales taxes, 13% from the lottery, 5% from corporate tax, and less than 30% from various other sources. Florida’s sales tax is 6%, plus an additional city tax that in some areas can reach a total of 8.5% (although some items are exempt, such as groceries). Even though NJ’s income and property taxes hog the negative limelight, the state also has its own flat sales tax of 6.625%. So, if it’s enough for Florida, why not Jersey?
The Sunshine State has a population of 20.6 million versus NJ’s 8.9 million residents. This begs the questions, are Floridians less expensive to support? Are they operating with economies of scale versus the smaller, congested states of the northeast? Or is The Garden State offering an array of better services its residents take for granted, such as not pumping our own gas? Let’s look at where all the money is going…
- Education– Florida allocates 28% of their budget to education, spending $7,408 per pupil, below the national average of $11,762, and well below NJ at $18,235. Teachers in Florida average a $47,267 salary (54% higher than the state’s median income) versus NJ’s teachers at $76,430 (46% over their median income). Nevertheless, Florida is ranked 7th overall in education and 1st in higher education by US News, and NJ at 2nd and 28th, respectively.
- Law Enforcement– A cop in Florida can expect a $49,085 average salary and $87,490 in NJ. NJ ranks 4th in public safety whereas Florida is 35th.
- Government Workers Pension and Post-Retirement Benefits- Florida has $20.2 billion of unfunded liabilities in this category, which pales in comparison to NJ’s over $150 billion deficit (4x the state budget). In 2001 NJ’s public unions successfully lobbied legislature for a 9% pension increase, a reduction of employee pension contributions from a suggested 5.5% down to 3.5% of salary, and ability to retire 5 years earlier at full pension. Florida also does not have a prevailing wage law like NJ does.
Consideration of these statistics and many more has led Truth in Accounting to rank Florida with a “C” for fiscal responsibility with $11.6 billion of debt versus New Jersey graded an “F” provoked by $195.5 billion of debt.
In conclusion, maybe Florida is right for some while New Jersey for others. Some economists posit that Florida hinders the poor by leaning on their regressive sales tax (poorest 20% pay 12.9% of their total income to state and local taxes while the top 1% pay only 1.9% of their income) and bolsters the rich by being one of only seven states without a progressive income tax, as well as not having estate or inheritance taxes. It doesn’t take an economist to realize retiring on a lofty NJ state pension to a tax climate like Florida makes sense, especially if primary education is not a major concern. Unless there is an upheaval of the system, I project more government workers will strive to make their fortune in the Garden State, send their kids away for college, and eventually reap their rewards in the Sunshine State. A word of caution, the cost of providing healthcare to one person over age 65 is 3-5x higher than someone under age 65. Considering this is Florida’s fastest growing segment, does their plan of senior citizen absorption have staying power?