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

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