Redesigning Cost of Living Adjustments Would Improve PERA Sustainability
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Commentary

Redesigning Cost of Living Adjustments Would Improve PERA Sustainability

The Public Employees Retirement Association Pension Solvency Task Force projects PERA currently has only a 38 percent chance of reaching full funding by 2043.

Cost-of-living adjustments are designed to protect retirees against inflation. When the Public Employees Retirement Association’s cost-of-living adjustment is untied from inflation it serves more as an annual pay raise for retirees—at the expense of active and future employees.

Pension Debt Presents a Growing Challenge to New Mexico

  • New Mexico Gov. Michelle Lujan Grisham’s Public Employees Retirement Association (PERA) Pension Solvency Task Force projects PERA currently has only a 38 percent chance of reaching full funding by 2043.
  • Moody’s Investors Service cited New Mexico’s pension liabilities when it downgraded the state’s bond rating in 2018, the second downgrade in two years.

PERA’s Current Cost-of-Living Adjustment Policy Is Flawed

  • A COLA is meant to protect the purchasing power of retirees’ pension payouts, but PERA’s current 2 percent compounded COLA is flawed.
  • By being locked to a fixed rate instead of floating with inflation, it effectively acts as an automatic, upward shift in benefits untethered to any actual change in consumer prices in the economy.
  • For several years consumer price increases have fallen below 2 percent, driving pension liabilities— including unfunded liabilities—artificially higher through the current “autopilot COLA” mechanism.
  • The proposed non-compounding, profit-sharing COLA structure, along with other COLA changes, offers PERA a more sustainable approach and would help increase the likelihood of achieving full funding by 2043 from a projected 38 percent to 63 percent, according to the task force.

The Pension Solvency Task Force’s Recommended Solution

  • The governor’s Pension Solvency Task Force recommends a temporary shift to a non-compounding COLA that acts like a bonus and then transitions to a profit-sharing approach.
  • Under the proposal, COLA rates are projected to average out to 1.64 percent annually through 2049, by which year PERA is assumed to reach full funding.
  • Overall, the proposed COLA structure is a more sustainable approach. The projected 1.64 percent average COLAs—compared to the current fixed 2 percent COLA—would slow actuarial liability accrual and improve PERA’s funded status.

Redesigning Cost of Living Adjustments Would Improve PERA Sustainability

Why PERA Being Only 71 Percent Funded Is Not Enough

Why Reform PERA Now

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