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Most public pensions may run out of money in 30 years

By   /   April 11, 2014  /   News  /   No Comments

AP file photo

TROUBLE HEAD: Ray Dalio’s Bridgewater Associates, says 85 percent of public pension funds are in deep trouble.

 

By Rob Nikolewski │ New Mexico Watchdog

SANTA FE, N.M. — Public pension systems across the country may be heading toward a financial meltdown, according to a series of stress tests conducted by a respected hedge fund.

Bridgewater Associates, based in Wesport, Conn., estimates it will take about $10 trillion for public pensions to meet their financial obligations in the coming decades as an aging population retires, but according to Bridgewater’s report there is only about $3 trillion in assets to invest.

In order to cover the coming expenses, Bridgewater estimates pension plans would need to earn an annual return of 9 percent.

The report said most states’ public pension systems work on a presumption of a 7-8 percent annual return on their investments, but Bridgewater says a more realistic goal is 4 percent — or even less.

Given all those factors, Bridgewater’s report concludes that as much as 85 percent of public pension plans could run out of money within three decades.

New Mexico’s two big public pension plans — the Public Employees Retirement Association and the Educational Retirement Board — work on presumptions of annual returns of almost 8 percent.

On the other hand, New Mexico is one of the few states that have passed a pension reform “fix” to try to tackle the looming financial problem.

In the 2013 legislative session, Republicans and Democrats — working with PERA, ERB and the state’s chapter of American Federation of State County and Municipal Employees — hammered out bills aimed at shoring up pension solvency.

“We haven’t let ours go completely in the cellar,” said state Sen. Stuart Ingle, R-Portales, who sponsored the ERB fix. “We tried to tackle the problem and I’m hopeful that we solved it. But our investments have to make some money. If not, we’ll have to come back and change them.”

State Sen. George Muñoz, D-Gallup, spearheaded PERA pension reform in the 2013 session, but worries about the annual rate of return assumptions.

“I think the 6 percent range, 6 and three-quarters” is more realistic, Muñoz told New Mexico Watchdog. “You’re floating that line. The economy is such a rollercoaster, there are no flat line projections where you can get a solid smoothing over for a three to five year period.”

The ERB plan works on a presumption of 7.75 percent a year. That’s pretty high, but last month ERB reported its investment portfolio returned 11.7 percent for the calendar year.

Ingle said adjustments may be needed in the future, but is relieved New Mexico passed the pension bill.

“Before, it was a like a gusher,” he said. “Now there’s a certain stream of money going out, but the pipe’s cut down from 12 inches to maybe three.”

Contact Rob Nikolewski at [email protected] and follow him on Twitter @robnikolewski

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Rob formerly served as staff reporter for Watchdog.org.