Faculty Retirement Incentives by Colleges and Universities

John H. Pencavel, Stanford University
April 2004

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The end of mandatory retirement has given tenured faculty a new job privilege. Except for faculty dismissed for cause, a tenured faculty member's decision to leave a University is now entirely at the discretion of the faculty member. At one time, the implicit contract between a university and a professor involved tenure for a certain number of years followed by its termination at a specified age. The professor was protected from job dismissal for his views, but in return the institution was permitted unilaterally to sever its association with him at a particular age. With the end of mandatory retirement, this University-initiated severance has been terminated.

Without mandatory retirement, universities and colleges have resorted to other means to induce employment separations. The purpose of this paper is to consider these other means and to consider how institutions of higher education may be expected to respond to the changes resulting from the end of mandatory retirement. Though the literature often portrays Universities' policies to induce employment separations as if they are distinctive to academia, in fact there are many examples in labor markets of employers devising procedures in response to constraints placed on their activities in terminating the employment of workers.

The paper will make use of two sets of data. One data set is drawn from the Survey of Changes in Faculty Retirement Policies conducted by Ronald Ehrenberg and his colleagues at Cornell University.¹

The survey was conducted in August and September 2000 and it collected information from 608 institutions. I augment this useful survey with information on these institutions kindly provided by the American Association of University Professors.²

The second data set is that taken from the faculty payroll and benefits offices at the University of California (UC). In the early 1990s, the UC system engaged in the largest "buyouts" (voluntary severance payments) of any academic institution in history. The first Voluntary Early Retirement Incentive Program (VERIP) was extended in academic year 1990-91 and offered additional pension benefits to those who quit employment by 1 July 1991. The second VERIP was offered in 1992-93 and the resignation date was 1 January 1993. The third VERIP was introduced in 1993-94 and the separation date was 1 July 1994. Why were these buyout programs instituted, how did they operate, and what was their effect?

A tentative organization for the paper is as follows:

1. Introduction.
   This provides a statement of the general issues facing colleges and universities. How different are academic institutions from other employers?
   
   
2. Pension Plans & Retirement Patterns.
   Many university policies designed to induce older faculty to relinquish tenure are linked to the characteristics of the pension plan. The terms of the individual's pension plan has a marked effect on whether the individual elects to retire. One theme running through the paper is the important consequences of choice of pension plan.
   
   
3. What Retirement Incentives Do Universities Use?
   Some incentives are in place for a specific period of time in response to a particular and temporary set of circumstances. On the other hand, some incentives are viewed as part of an institution's permanent personnel policies designed to address the enduring issues posed by the end of mandatory retirement.
   
   
4. Phased Retirement Programs.
   With these programs, faculty do not move discontinuously from full-time employment to full-time retirement, but rather for a period of time they occupy an intermediate state in which their teaching and advising responsibilities are reduced over those responsibilities associated with full-time employment. Data from the Cornell study will be analyzed to determine the institutional variables associated with the incidence of phased retirement programs. Three classes of variables will be examined for their association with the occurrence of phased retirement programs: the type of pension program, the type of institution (as measured by the Carnegie classification), and whether the institution is private or public.
   
   
5. Buyout Programs.
   A buyout program offers certain faculty for a specified period of time greater returns to relinquishing tenured employment. Buyouts are by no means restricted to college and university faculty. Data from the Cornell study will be investigated to identify the institutional variables associated with the incidence of buyouts.
   
   
6. A Case Study.
   The University of California in the early 1990s. What does this remarkable experience tell us about
   
   1. the ability of universities to forecast with accuracy the impact of these buyout incentives on the numbers retiring?
      
   2. even if the numbers retiring are predicted accurately, what about the composition of retirements? Is there an adverse selection problem, i.e., the most productive senior faculty retire and the least productive remain?
   
   
7. Conclusion.
   What lessons are there?

1. This survey was a collaborative effort involving the American Association of University Professors, the TIAA-CREF Institute, the American Council of Education (ACE), the College and University Professional Association for Human Resources (CUPA-HR), the National Association of College and University Business Officers (NACUBO), and Cornell University. See Ronald G. Ehrenberg (2003).
2. In particular, I am most grateful to Dr. John W. Curtis, Director of Research at AAUP for providing these data and for help in interpreting them.