Spiking: Only Possible in Public Retirement Plans

MIchael and Conrad
NMPolitics - Because of spiking, New Mexico public school teachers risk their retirements. Spiking only happens in the public sector. Here is the core problem: Public sector retirement plans allow participants to pay into the retirement plans, but what retirees receive is not closely connected to what they paid in. Spiking is working for most of the professional life at a lower wage and then working a few years at a higher wage and having the retirement account pay as if the contributions were always at the higher level. The crisis caused by spiking is that the money teachers and the State of New Mexico set aside for retirements is significantly less than it needs to be. For many years no one has done more than say, “Looks like a problem.” I understand the reluctance, because as soon as I started talking about it on my radio talk show some people wanted to shoot (metaphorically I hope) the messenger. I got several cases of the stink eye from people who thought I should not wise up the citizens. If teachers remain teachers throughout their careers and then go to their happy places of retirement, there is no real problem. Well, still a small problem, because, again, what they pay in is not directly connected with what is paid out, which always goes against economic principle. But it is close enough. Private retirement plans pay out entirely based on how much money is put in. But this is not the same in the public sector.
The people who set up the New Mexico public school teacher retirement instead went against every economic principle of good practice. The formula looks at years of service plus age to equal 75 and computes the payout based on the high five years of paying into the system. It is not based on how much money is put into the account. So, if a teacher pays into retirement for 20 years while making on average $40,000 a year and then works for five years as an administrator at $80,000 a year, the entire retirement is based on the high salary even though the retirement system did not collect the sufficient resources to sustain this deal. Most public school administrators first had a number of lower paid years in the classroom. So the retirement account of that administrator is always short dollars that someone else has to make up. Read full column here: News New Mexico



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