Every January, a howling can be heard in and around Santa Fe, New Mexico.  Sometimes, it’s just the wind coursing through the nearby Sangre de Cristo mountains.  More often, the howling is coming from the members of the New Mexico state Legislature, which convenes every January for a 30- or 60-day session.  The howling is the annual complaining about the fact that the New Mexico Legislature is the only one in the country that does not receive an annual salary.  Instead, it receives a daily per diem based on the IRS travel reimbursement rates for Santa Fe.  This year, the amount is $247.  Strangely silent from the complaining legislators is any discussion of a need to modify their retirement plan.  You will soon see why.

The primary statutes controlling legislators’ retirement pay are contained in New Mexico  Statutes at Large (NMSA) 10-11-43.1 to NMSA 10-11-43.5.  It is an extraordinarily generous defined benefit plan.  Unlike any other state legislator pension plan in the country, a legislator in New Mexico can retire after only ten years of service and immediately start receiving a pension regardless of his age.  It is not uncommon for ex-legislators in their thirties and forties to start receiving pensions.

To show the generosity of the plan, I will use the following hypothetical.  A 28-year-old man is elected to the New Mexico Legislature and serves for ten years from January 1, 2015 until December 31, 2024.  He starts receiving his pension in 2025, when he is just 39 years old.  His life expectancy in 2025 is another 35.94 years.  He makes the following plan contributions during his ten years in the Legislature:

The formula to determine the retirement benefit after ten years of service is the per diem for Santa Fe in 2025 ($247) times (14%) times (90) times years of service (10).  $247 * .14*90*10 = $31,122 annual pension.  When the annual pension is multiplied by the life expectancy of 35.94, the total comes to an astonishing. $1,118,524.  That figure is 140 times the $8,000 pension contribution amount made by the legislator.

But wait.  Cost of living increases are permitted in the pension two years after the pension begins.  Here are the figures, assuming a 3% cost of living increase beginning in year 3 and each year thereafter until the end of the 36-year actuarial period.

With an assumed cost of living increase of 3% per year beginning in year 3, the total comes to the extraordinary figure of two million dollars after 36 years.  This is 250 times the original contribution of $8,000.  Mexican drug cartels would be envious of the profit margin.

Gluttony, thy name is the New Mexico state Legislature’s pension plan.

Image via Pxfuel.