Ponzi scheme

PERA’s average investment return for the last 5 years has been 6.3%.  Even with a Fund Ratio of 100%, the future COLA will be 0.5% if PERA’s average investment return is 6.5% or less. 

The fund ratio in 2023 was 57.6%.  The fund ratio is the ratio of available assets divided by the pension liability.  Currently, PERA can only pay $0.58 for every $1.00 it owes to current and future retirees. 

Tier 2 Members (employed after June 30, 2013) 

* See table above for an estimate of COLA 

Pension Factor and Final Average Salary 

Retirees over 75 

In 1995, the pension factor multiplier was increased from 2.5% to 3.0% and applied to all service credits already earned by active employees. The retroactive increase in benefits resulted in many retirees receiving an enhanced benefit for which contributions were never made, increasing the fund liability with no source of funding to cover the increase in benefits.   

The final average salary is based on 36 consecutive months. 

Tier 1 Members 

The pension factor multiplier is 3.0% 

The final average salary is based on 36 consecutive months. 

Tier 2 Members 

The pension factor multiplier is 2.5% 

The final average salary is based on 60 consecutive months. 

Example of how the pension factor multiplier and the final average salary are used to calculate pension: 

Years of Service Credit  X  Pension Factor  X  Final Average Salary  =  Monthly Benefit 

Example: for a member retiring with 25 years of service credit with a final average monthly salary of $5,333. 

For Tier 1 Member: 

For Tier 2 Member:  

The value of the pension after 30 years for a Retiree over 75 would be $2.14 million based on 2.5% COLA.  For a Tier 2 Member, the value would be $1.29 million based on 0.5% COLA.   

Retirement Age Requirement: 

Tier 1 Members and Retirees over 75 

25 years of service could retire at any age. 

Tier 2 Member 

Any age if the sum of the member’s age and years of credited service equal at least 85 (Rule of 85 for retirement).  For a member with 25 years of service would have to be age 60 to retire (25 years of service + age 60 = 85) 

Social Security and other State Pension specify a minimum age for starting to receive a pension.  In 2013 Senate Bill 27 finally addressed the minimum age, but it only applies to Tier 2 Members (employees hired after June 30, 2013).  This problem was discussed 29 years ago and nothing was done. An article in the Albuquerque Journal dated December 13, 1994, titled: “Out of Control Annuity System” in the Albuquerque Journal addresses the problem with the pension: 

There is no age requirement for receiving a pension, so an individual who begins working for the state at age 18 could retire at age 43 with a pension worth 75% of his or her final salary. (Many state workers do retire in their 40s.)  After three years, an automatic cost-of-living adjustment (COLA) of 3% kicks in and is added each year to the base pension. 

Since a 43 year old has a life expectancy of 40 years, the state will in all probability end up paying the young retiree a pension for a much longer period than the individual actually worked. A state worker with a final average earning of, say, $32,000 would receive an initial pension of $24,000.  With an annual COLA benefit added, the retiree will receive a pension of $71,645 a year. 40 years later. This amount is close to $2 million for young retirees, with an average life expectancy. 

Employee Pension Contribution 

Tier 1 and 2 Members 

Senate Bill 72 increased employer and employee contributions by 0.5 percent per year for four years resulting in a 2% increase in both contribution rates.  Effectively, employees will receive a 2% reduction in their pay from the contribution increase rate to the pension.

House Bill 106 – 2023 Legislation Session 

In the 2023 legislative session, House Bill 106 was enacted, raising the maximum pension benefit from 90% to 100% of the final average salary. The rationale behind this adjustment is to incentivize workers to prolong their careers.  

In the Fiscal Impact Report for Bill 106 (https://www.nmlegis.gov/Sessions/23%20Regular/firs/HB0106.PDF), it references Article XX, Section 22, of the New Mexico Constitution prohibits the Legislature from enacting any law that increased the benefits paid by PERA unless adequate funding is provided.   

PERA provided the following actuarial analysis for the House Bill: 

PERA’s actuaries indicated that (HB 106) would cause an initial increase to the unfunded liability by $25 million and the amortization period by 1 year and increase the shortfall by 0.07 percent.  However, they also noted members who retire later would lower the cost to the retirement system which could offset the costs noted above. 

According to PERA’s actuarial analysis, only a small percentage of employees are predicted to continue working to attain the maximum benefit. However, there is a risk that the actuarial analysis may prove inaccurate, leading to a potential drain of funds required to support the Bill. 

If the State Government encounters challenges in recruiting and retaining workers, it has the option to address the issues by increasing salaries.  However, it’s important to note that the New Mexico Constitution prohibits the enactment of any law that raises the benefits paid by PERA unless sufficient funding is provided. Unfortunately, Bill 106 did not specify a funding source. 

Summary: 

The NM State’s attempt to make its Pension Fund solvent is not fair for all participants.  Workers forgo higher wages in exchange for a promise of a future payment secured by trust property.   The trust is supposed to be used to pay the same pension to all the beneficiaries.  The State of New Mexico has created different classes of members treating each class differently with the oldest retirees receiving the best benefits and the current employee having to pay more into the pension and receiving the least benefits.   

This raises concerns about fairness and the equitable distribution of pension benefits, as the State has created different classes of members, treating them dissimilarly.  It appears the State of New Mexico is modeling its pension reforms after a Ponzi scheme.  

Under ERISA (Employee Retirement Income Security Act), the State also has fiduciary responsibilities. One of the fiduciary responsibilities is to not give preferential treatment to beneficiaries within a particular class of members or otherwise favor one class over the others.  Effective trustees must balance the interests of all types of members, treating each class of members fairly.  The problem is ERISA does not govern government pensions.