According to a recent study, New Mexico’s pension plan for state employees will run out of money in the year 2023, an event that would trigger a series of excruciating economic and political decisions for lawmakers that would affect not just the retirees inside the system but every New Mexico taxpayer.
Economists Joshua Rauh of the Kellogg School of Management at Northwestern University and Robert Novy-Marx of the University of Chicago Booth School of Business have developed a model of state pension fund payments across the US and identified 31 states they predict will run out of state pension fund money within the next 16 years. New Mexico falls within that range. In fact, the Rauh/Novy-Marx model predicts that by 2023, New Mexico’s state pension plan will go bust.
The model is based on a given state contributing to its pension funds at the present value of any newly accrued benefits and working on an assumption that a state will earn 8 percent on their investments. Using those assumptions, New Mexico would:
- Run out of pension fund revenue in 2023
- Then be expected to pay out $2.6 billion in state employee pensions in 2024
- That $2.6 billion figure represents an estimated 46 percent of the entire state tax revenue for a given year
In other words, if the Rauh/Novy-Marx model holds true, in less than 15 years, New Mexico will have pension obligations that equal nearly one-half of the state’s entire annual intake of taxes.
“The only solutions that will work are solutions that are politically not viewed as desirable,” Rauh says with classic academic understatement.
Rauh goes on to say in a recent Internet posting entitled “The Day of Reckoning for State Pension Plans” that “If we are going to keep providing generous pensions to state workers, taxes will have to rise dramatically in the near future to pay for them.”
Some states — like Colorado — are looking to renege on the promises it made to future and current retirees in the face of a looming fiscal crisis that the US Chamber of Commerce estimates at $3 trillion nationally. As one would expect, state employees in Colorado are howling, but even if New Mexico lawmakers wanted to imitate the actions of Colorado legislators, the going may prove considerably tougher.
That’s because New Mexico is similar to at least eight states in which public-sector pension obligations are not only protected by state constitutions, they are also protected by explicit benefit guarantees.
According to Article XX of the New Mexico Constitution, “upon meeting the minimum service requirements … a member of a plan shall acquire a vested property right with due process protections under the applicable provisions of the New Mexico and the United States constitutions.”
In plain English, even if New Mexico lawmakers had the gumption to roll back some pension benefits, they might well have to clear the legislative hurdles of actually amending the state constitution.
Here is a list of when Rauh and Novy-Marx predict that some respective state pension funds will run dry:
Note: On Friday morning (Aug. 10), the Retirement Systems Solvency Task Force is meeting at the Roundhouse at 9 a.m. I’ll attend the hearing and talk to members of the task force and get their reaction to this study.
For more on Colorado’s efforts to curb its state pension plan, click here.
For more on US Chamber of Commerce estimates of a $3 trillion pension shortfall, click here.
If all this makes you worried sick, click here. (It’s a site devoted to stress relief.)