New Mexico Restructures Pensions to Address Shortfall

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Written by Dean Baker   
Saturday, 13 April 2013 05:15

New Mexico Republican Governor Susana Martinez signed legislation last week that overhauled the state's public pension system. This was a big deal because New Mexico had one of the largest funding gaps, relative to the size of the state's economy, of any state in the country. There was pressure from the right for big cutbacks or even the elimination of defined benefit pensions altogether. 

As it turned out, the overhaul left the main structure of the pension system intact. This was the result of an effort by the public employee unions in the state to get out in front of the issue and push through a plan their members could accept before the right had the chance to jam through a more onerous version of "reform."

To be sure, the workers made substantial concessions. They agreed to lower end age limits for collecting pensions and longer service requirements. They will also be contributing more from their paychecks in the future to support the system. But people who have spent their careers working for the state will still be able to count on a decent retirement. Unfortunately this is becoming an all too rare story in the United States these days.

I'm happy to say that CEPR played a small role in this one. Some on the right, who wanted to derail the plan in favor of eliminating the DB pension altogether, argued that the 7.75 percent rate of return assumption used by New Mexico's plans was unrealistically high. They wanted to substitute a much lower rate of return based on high-grade bonds, which would have made the gap in funding seem impossibly large.

CEPR's work in this area proved very useful. I went to New Mexico and spoke with many of the leaders in the legislature and addressed the relevant committees of the state House and Senate. They were willing to move forward with the plan because they felt comfortable that the return assumptions applied to the plans were reasonable and derived from a realistic assessment of the future prospects of the economy and the stock market.

Hopefully other states with troubled plans (these are the exceptions) will be able to use New Mexico as a model.