A better way to borrow or save

Finally there’s an alternative to payday lending.

Thanks to the simple mechanism of payroll deductions, some New Mexico workers can now borrow money without having to resort to the usurious practices of payday lenders.

Affordable loan programs have been adopted by several New Mexico county governments for their employees. No legislation was required. The program is being promoted by the New Mexico Association of Counties, according to Susan Mayes of the Association.

Under the program, an employee may borrow between $1000 and $3000 and repay the debt within one year through payroll deductions.

The official interest rate is 24.99 percent, but actual interest is considerably less because the loan is amortized over time. Every payment reduces the principal, so the loan rate works out closer to 14 percent. For example, for a $1000 loan paid off in 12 months the total interest will be about $140.

As of late October, 14 county governments have approved offering this to their employees: Bernalillo, Catron, Dona Ana, Eddy, Grant, Harding, McKinley, Otero, Rio Arriba, San Miguel, Socorro, Taos, Torrance and Valencia. The programs are not up and running yet in all of these counties. Mayes said she is optimistic that other counties will join.

Cost to the employer is only the administrative cost of implementing the payroll deduction. The program works with a company called True Connect, which in turn works with banks. The bank is the lender and assumes all the risk. The employer’s only requirement is the bookkeeping for the payroll deduction and a procedure for paying off the loan if the employee leaves.

According to Mayes, private employers could do the same thing.

We may soon be hearing about another option using payroll deductions: savings programs for private-sector employees, especially those working in small businesses.

This initiative is being spearheaded by AARP, which is concerned that millions of future retirees will not have enough savings to retire. It would create a program that would enable private sector employees who have no other retirement plan at work to save small amounts through automatic payroll deductions.

The proposal was introduced in the 2017 legislature as Senate Joint Memorial 12, which authorized a task force to study the issue. The memorial passed both houses unanimously. The task force’s report has been released, and legislation is expected in 2019. The task force endorsed the program.

According to the report, 67 percent of New Mexico private sector employees have no retirement savings – worse than the national average of 62 percent.

As proposed, money from voluntary payroll deductions would be deposited to retirement accounts owned by the employee. Employees could determine their own savings amount, possibly as low as $5 a week. Money would be pooled, with the intention that this investment pool would generate a marketplace of options from the financial community.

Employers would administer the payroll deduction but would not be required to contribute. State government would facilitate this process but would play a minor role.

According to DeAnza Valencia, AARP associate state director, one reason poor people stay poor is that they can’t afford to save. But studies show low income people can save successfully through payroll deductions.

A similar program is already functioning in Oregon. One in California is set up to start but is under litigation. The California program requires employers to enroll but does not require employees to participate. New Mexico could choose whether or not to make its program mandatory for employers who don’t offer other savings options.

The detailed report can be found on the legislature website (www.nmlegis.gov) as a series of handouts from the Investment and Pensions Oversight Committee.

If the savings program legislation passes, it would be sensible for the two programs to coordinate so that employees who have paid back their loans are then able to start saving.

Triple Spaced Again, © New Mexico News Services 2018


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