The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
New Mexico's pension system is based on a benefit formula that is not neutral, meaning that each year of work does not accrue pension wealth in a uniform way until teachers reach conventional retirement age, such as that associated with Social Security.
Teachers' retirement wealth is determined by their monthly payments and the length of time they expect to receive those payments. Monthly payments are usually calculated as final average salary multiplied by years of service multiplied by a set multiplier (such as 1.5). Higher salary, more years of service or a greater multiplier increases monthly payments and results in greater pension wealth. Earlier retirement eligibility with unreduced benefits also increases pension wealth, because more payments will be received.
To qualify as neutral, a pension formula must utilize a constant benefit multiplier and an eligibility timetable based solely on age, rather than years of service. Basing eligibility for retirement on years of service creates unnecessary and often unfair peaks in pension wealth, while allowing unreduced retirement at a young age creates incentives to retire early. Plans that change their multipliers for various years of service do not value each year of teaching equally. Therefore, plans with a constant multiplier and that base retirement on an age in line with Social Security are likely to create the most uniform accrual of wealth.
New Mexico's pension plan is commended for utilizing a constant benefit multiplier of 2.35 percent; however, teachers may retire before standard retirement age based on years of service without a reduction in benefits. For teachers hired on or after July 1, 2010, the state allows teachers with 30 years of service to retire at any age, while other vested teachers with less than 30 years of service may not retire until age 67. Teachers may also retire if they qualify for the "Rule of 80," meaning that their age plus years of service equal 80. However, their benefits are reduced if they are below age 65 or have less than 30 years of service. Therefore, teachers who begin their careers at age 22 can reach 30 years of service by age 52, entitling them to 17 years of additional retirement benefits beyond what other teachers would receive who may not retire until age 67. Not only are teachers being paid benefits by the state well before Social Security's retirement age, but these provisions also may encourage effective teachers to retire early, and they fail to treat equally those teachers who enter the system at a later age and give the same amount of service.
New Mexico Educational Retirement Board, Member Handbook, Updated September 2010 http://www.nmerb.org/pdfs/erbhandbook.pdf
End retirement eligibility based on years of service.
New Mexico should change its practice of allowing teachers with 30 years of service and teachers whose years of service and age equal 85 to retire at any age with full benefits. If retirement at an earlier age is offered to some teachers, benefits should be reduced accordingly to compensate for the longer duration they will be awarded.
Align eligibility for retirement with unreduced benefits with Social Security retirement age.
New Mexico allows all teachers to retire before conventional retirement age, some as young as 52. As life expectancies continue to increase, teachers may draw out of the system for many more years than they contributed. This is not compatible with a financially sustainable system (see Goal 4-H).
New Mexico was helpful in providing NCTQ with facts that enhanced this analysis.
In response to the analysis's statement, "New Mexico's pension system is based on a benefit formula that is not neutral, meaning that each year of work does not accrue pension wealth in a uniform way until teachers reach conventional retirement age, such as that associated with Social Security," the state contended that "normal retirement age" is more accurately stated as "once retirement eligibility requirements are met."
New Mexico stated its retirement options for teachers hired prior to July 1, 2010, which include the following: 25 years of service with no minimum retirement age; "Rule of 75" with a reduction if retiree is younger than age 55; five years of service at age 65. Further, the state included the retirement eligibility options for teachers hired on or after July 1, 2010, that are covered in this analysis.
In order for a system to be considered neutral, each year of work needs to accrue pension wealth in a uniform way until reaching conventional retirement age. Pension wealth cannot be uniform if a system has retirement based on years of service, as New Mexico has, rather than age. It is the existence of these retirement eligibility requirements that create the unequal peaks in wealth and encourage teachers to retire.