Chronically among the poorest states, New Mexico received the dubious distinction in 2015 of being ranked 51st by the Measure of America, behind Nevada and Mississippi, which is based on 16 indicators related to the economy, education and community. New Mexico’s drop to last place is a signal that the next governor must redouble efforts to increase the prospects for New Mexicans.
New Mexico Development Accounts represent an innovative model for accelerating the upward mobility of New Mexicans. Integrating behavioral economics, asset building and impact investing, NMDAs represent a new social contract between citizens and government.
• The default for an NMDA would have workers save 5 percent of wages, increased to 10 percent at worker discretion, automatically diverted to an incentivized plan, unless they opt out.
• The choice architecture matches worker savings for dedicated purposes: finishing vocational school or college, starting a business or purchasing a first-time home. NMDAs would be progressive, with savings matched according to worker attributes, so that earnings at half the federal poverty level would be matched 3 to 1, for the poor 2 to 1, and for other workers 1 to 1. NMDAs would be universal, tax exempt, portable and heritable.
• The economic development factor is significant insofar as, prior to withdrawal for dedicated purposes, NMDAs would be held in local financial institutions, providing capital for economic development projects.
• The financing of NMDAs would be through Social Impact Bonds (SIB). Conceived by the Young Foundation in Britain, an SIB is a contract arranged by a third-party intermediary, obligating government to pay principle plus interest to private investors, providing predetermined outcomes are delivered by service providers. An SIB strategy is innovative insofar as payment is contingent on delivering constructive, cost-effective outcomes. The role of government is limited to authorizing, evaluating and paying on SIBs once outcomes are delivered.
As a means for investing in human capital, NMDAs parallel the long-standing practice of issuing bonds for physical infrastructure projects, such as schools and airports.
Is there sufficient capital for NMDAs? Evidence suggests that certain investors, such as private foundations, socially oriented funds and progressive individuals, are quite willing to put their capital to public purpose. In 2013, Goldman Sachs and the J.B. Pritzker Foundation announced a $7 million SIB for 3,500 Utah children to receive high-quality pre-K education. By 2017, more than 60 SIBs have been launched in 15 countries, representing more than $200 million. Recently, the Ford Foundation committed $1 billion toward impact investing.
A mature NMDA scenario would generate significant savings. According to the Department of Labor, in 2016, the median wage in New Mexico was $15.82/hour for 805,440 workers. Assuming a 70 percent NMDA participation rate, 5 percent of wages would produce $930.75 million in savings annually. For each 100 workers, $165,000 would be deposited annually in local financial institutions, over time sufficient to leverage modest economic development projects.
Due to progressive matching, NMDAs for the most destitute New Mexican workers would accrue annualized matched savings of $2,620.40, while the working poor would attain $3,931.20 and other workers $3,301.64. Since NMDAs would be heritable, families would build inter-generational wealth. Over decades, NMDAs would become an engine for family prosperity.
Much has been written about widening economic inequality in America, which also is evident in New Mexico. Despite a reputation for hard work and faith in the American Dream, New Mexicans have been disadvantaged compared to their compatriots in other states. Extending education, home ownership and business opportunities through NMDAs would attract bipartisan support and, in the process, rectify a long-standing gap between the talents of New Mexicans and the realization of their aspirations.
This essay is drawn from David Stoesz’s forthcoming book, “The Investment State: Charting the Future of Social Policy.”