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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education 4 Pensions, Retirement Programs, and Costs Faculty near retirement are concerned not only about receiving an adequate pension income and health care insurance (Gray, 1989; Mulanaphy, 1984) but also about losing contact with their colleagues, students, institution, and academic field (see, e.g., Daniels and Daniels, 1990b; Felicetti, 1982). Some administrators and faculty have expressed concern that faculty may postpone retirement if they are uncertain about provision for financial, scholarly, or collegial needs. The idea that colleges and universities should respond to these needs is not a new one. Harvard President Charles Eliot defined the goals of a faculty pension program when proposing the nation's first private university ''Retiring Allowance Fund'' in 1879: First, it would add to the dignity and attractiveness of the service, by securing all participants against the chance of falling into poverty late in life, or of seeing an associate so reduced; secondly, it would provide for participants the means of honorable ease, when the capacity and the inclination for work abate. The Carnegie Foundation for the Advancement of Teaching established the Teachers Insurance Annuity Association (TIAA) in 1937 to administer a pension program for faculty at colleges and universities nationwide. The tradition of recognizing an affiliation between retired faculty and institutions is even older; the position of emeritus professor dates back at least to the early nineteenth century. Colleges and universities need to balance the goal of providing for retired faculty with other objectives: preserving hiring opportunities, developing the ability to predict and plan for those opportunities, and controlling scarce resources. As noted in Chapter 2, some institutions will face in
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education creased costs and decreased hiring opportunities if mandatory retirement is eliminated. Economic conditions and employment, benefit, and discrimination law limit an institution's ability to respond to potential effects of eliminating mandatory retirement. The committee has two additional goals that guided its assessment of retirement benefit programs. First, we believe retirement benefit programs should create neither incentives to continue working nor disincentives to retirement: That is, we believe faculty retirement decisions should depend primarily on factors other than financial concerns. Second, we believe any changes a college or university makes in its retirement benefit policies should be within the bounds of its current faculty compensation budget. The committee recognizes that colleges and universities have limited sources of additional revenue, and we have sought ways to limit potential expenses created by the elimination of mandatory retirement. In this chapter the committee examines how administrators, faculty, and collective bargaining units can analyze and, if necessary, adjust faculty retirement benefit policies in order to meet both institutional needs for turnover and individual needs for retirement security. We first examine the effects on faculty retirement of two standard employee benefits: pensions and health care. We then examine two other retirement benefit options: continued faculty perquisites and retirement planning assistance. Throughout, we consider whether colleges and universities could use retirement benefit policies and programs to mitigate the projected negative effects of uncapping, that is, decreased hiring opportunities and increased costs. PENSIONS Goals The Commission on College Retirement (1990:168) stated goals for a faculty pension plan: First, a pension plan should provide income for the lifetimes of the retirees and their spouses. . . . Second, a pension plan should provide income that, when added to other sources of support available to the family, can be expected to maintain throughout retirement a standard of living comparable to that enjoyed immediately prior to retirement. As the commission's second goal suggests, retirement income can be measured by the extent to which it supports a pensioner's preretirement standard of living. Pension plans have traditionally been designed to provide retirees with an income that, when added to Social Security income, is equal to a proportion of their preretirement income by an expected retire
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education ment age. In the absence of special circumstances, such as poor health, retirees generally face fewer expenses than employees. Therefore, the proportion of preretirement income a retiree needs to maintain his or her preretirement standard of living is usually less than 100 percent (Commission on College Retirement, 1990). (We discuss the issue of retiree health coverage later in this chapter.) A 1988 amendment to the joint "Statement of Principles on Academic Retirement and Insurance Plans" of the Association of American Colleges and the American Association of University Professors recommends that retirement income from pensions, Social Security, and any other sources should provide continuing purchasing power equivalent to at least two-thirds of preretirement income. The committee accepts this definition of minimum adequacy, and out recommendations are based on that acceptance. The committee recommends that universities and colleges offer pension plans designed to provide retirees with a continuing (i.e., adjusted for inflation) retirement income from all sources equal to at least 67 percent of their preretirement income. In addition, we suggest that institutions set a maximum target for continuing pension income in the interest of best allocating scarce institutional resources and limiting inadvertent incentives to postpone retirement. We found that faculty at some universities with generous pension plans could increase their annual pension income by 10–14 percent, or several thousand dollars, by postponing retirement for I year (see Table 6 and discussion below). Colleges and universities could redirect any funds saved by limiting institutional pension contributions to other benefits for retired faculty, such as health care benefits and programs for retirees. The committee recommends that universities and colleges offer pension plans designed to provide retirees with a continuing retirement income from all sources equal to no more than 100 percent of their preretirement income. The committee's recommended pension income range calls for a continuing level of income (i.e., an income that continues to be equal to 67–100 percent of preretirement income in real terms), not just an initial level. Faculty are concerned not only about the level of income they will receive when they retire but also about whether inflation will erode that income over time. Inflation has seriously eroded pension incomes in the past, and we therefore recommend a range of pension incomes only when incomes in that range can be protected against inflation. Colleges and universities cannot meet the goal of providing for their retired faculty without protecting pensions against inflation. (We discuss ways of protecting pensions against inflation later in this section.) Moreover, worry about inflation may lead faculty to retire later than they would otherwise choose to do.
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education In recommending goals for pension contribution policies, we refer to income from all sources, so our recommendation depends in part on levels of Social Security income, and, for many faculty, it will depend on pensions from more than one institution. We have recommended that colleges and universities design institutional and, when applicable, faculty contributions to pension plans that will provide the difference between Social Security and 67–100 percent of preretirement income. Some colleges and universities already use programs such as matching employee pension contributions as a way to encourage saving for retirement. Of course, actual pension incomes vary, depending on institutional policies and market performance. In some cases faculty can choose to place their retirement contributions into investments with different rates of return, so an individual faculty member's pension will depend on his or her investment choices. Individual pensions may be based on employment at more than one institution or outside academia. Therefore, our recommendation proposes upper and lower bounds to guide pension contribution policies rather than a single target percentage of preretirement income. Types of Pension Plans Various researchers (e.g., Daniels and Daniels, 1990a; Lozier and Dooris, 1990) have estimated the number of faculty members covered by different types of pension plan, but not all pension plan providers or colleges and universities separate faculty from other employees in their pension records. In addition, approximately 11 percent of all colleges and universities offer faculty a choice of pension plan types (Daniels and Daniels, 1990a:7). Therefore, precise figures on the number of faculty covered by different types of plan cannot be calculated. Because the details of pension plans vary across the more than 3,200 colleges and universities in the country, we can only discuss general pension plan characteristics. Likewise, because the pension of any individual faculty member can be based on service at several colleges and universities and, in some cases, employment outside academia, disincentives to retirement and the level of financial reward for continued employment vary from individual to individual as well as from institution to institution. Approximately 6 percent of 4-year colleges and universities do not offer pension plans other than Social Security; they employ less than 1 percent of all faculty (Daniels and Daniels, 1990a: 1). The two major types of pension plans provided by colleges and universities in the United States are defined contribution plans and defined benefit plans. Two other plan types exist: hybrid plans—some of which have been designed to limit financial incentives to postpone retirement—and target benefit plans, but they are rare in higher education.
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education Defined Contribution Plans Defined contribution plans typically specify that the institution will set aside a percentage of a faculty member's salary to be invested in a pension fund account for the faculty member. In addition, faculty members can usually contribute up to some specified additional percentage from their own pretax earnings; in many cases they are required to do so. The pension fund may offer faculty members a choice of investment options, such as money market, stocks, bonds, or a combination of these. The faculty member, not the college or university, owns the accumulation and bears the investment risk. The college or university guarantees only to contribute its portion of the faculty member's salary, not to provide a fixed level of retirement income. On retirement, participants in defined contribution plans receive an annuity that is based on the amount contributed over the years, the accumulated earnings or appreciation (in the case of stock funds) of those contributions, and an actuarial calculation based on life expectancy. The pension fund may offer the faculty member a choice of ways to receive the income, with annuity designs that vary to adjust for expected inflation; to provide for a spouse or other dependents; or, in some cases, to allow the retiree to collect a lump-sum payment. Approximately 75 percent of 4-year U.S. colleges and universities offer defined contribution plans (Daniels and Daniels, 1990a:7). Most private colleges and universities offer this type of plan. The percentage of faculty covered by defined contribution plans is less than 75 percent because, on average, private institutions have fewer faculty than public institutions. Defined contribution plans are usually managed by private insurers, the largest of which is the Teachers Annuity and Assurance Association-College Retirement Equities Fund (TIAA-CREM). TIAA-CREF was established in part to protect pensions from the effects of faculty mobility. Because faculty members in defined contribution plans own their accumulations, they can continue to receive the benefit of interest earnings or stock appreciation on accounts associated with employment at an institution after leaving employment at that institution; this feature is commonly referred to as "portability." Defined Benefit Plans In defined benefit plans the amount of the pension benefit rather than the amount of money contributed is fixed. The institution guarantees a level of pension benefits and assumes the responsibility of saving to reach that level, in some cases by requiring faculty to contribute a portion of their earnings. The institution, not the individual, makes the decisions about investing pension contributions and bears the investment risk, because it
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education guarantees payment regardless of market performance. This can be costly: If pension fund investments do not provide enough income to cover the level of pension guaranteed, the institution must still pay the costs of the pension. Retirees receive benefits set by a fixed formula. Formulas are typically based on a retiree's years of service at the institution, the final salary or salary averaged over several years, and a multiplication factor to convert the number of years of service and amount of salary into a pension income. Some formulas include a maximum number of years of service that can be included in the calculation. Most defined benefit plans offered in higher education are patterned after or integrated with state employee or teacher retirement systems (Johnson, 1987:iv). Approximately 30 percent of 4-year colleges and universities, most of them public institutions, offer defined benefit plans (some also offer a defined contribution option (Daniels and Daniels, 1990a:21). These colleges and universities employ 50 percent of all faculty at 4-year institutions. Most public 2-year colleges are also covered by defined benefit plans. Defined benefit plans have the disadvantage of not being portable. A participant has a right to a pension that is based on a formula, not an accumulation he or she owns and keeps when moving to an institution in a different retirement system. For mobile faculty this feature can lead to a lower total pension income: A series of pensions based on short periods of service and, for the earlier jobs, lower final salaries adds up to a lower total pension income than a single pension based on the total number of years worked and the individual's final job salary (Commission on College Retirement, 1990:199, Employee Benefit Research Institute, 1990:13–14). Hybrid and Target Benefit Plans A few colleges and universities limit the amount of accumulation possible in a pension fund by offering a combination of defined contribution and defined benefit plans. One university substituted a defined benefit component based on salary and years of service for the previous base contribution of 5 percent of salary to a defined contribution account and continued to match faculty contributions to the defined contribution plan up to a maximum of 5 percent of salary. The new plan provides faculty members with a larger expected pension income at age 65, but a less rapidly increasing expected income at later ages, because salary increases tend to slow or cease, and the defined benefit component rises primarily owing to the additional years of service. A target benefit plan is a type of defined contribution plan that must meet additional IRS funding standards (Irish and Stewart, 1990; TIAA-
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education CREF, 1989). As in a regular defined contribution plan, the individual owns the accumulated savings and bears the investment risk. But in a target benefit plan, an employer varies its contributions to the plan on the basis of the employee's age or length of service with the aim of producing a certain level of retirement income (the "target benefit"). The target benefit is set, like the benefit in a defined benefit plan, as a function of the employee's salary, age, and years of service. The percentage of the employee's salary that the employer contributes to his or her account would vary gradually by age or years of service to produce an equal target retirement income for all employees reaching a designated normal retirement age, regardless of their years of service, or to produce a target income equal to a fixed percentage of salary times years of service. When the estimated funds in an employee's account reach the target level, using the assumptions in the formula that determine contribution rates, the employer discontinues its contributions. The actual pension paid, however, might not equal the target amount or be equal for retirees of the same age and with the same number of years of service. As in any defined contribution plan, the amount of a pension depends on market behavior and the investment options chosen by the participant. Furthermore, a participant's expected pension income would continue to increase by the value of compounded earnings and reduced life expectancy after contributions cease. Therefore, participants still have some financial incentive to postpone retirement. Target benefit plans are more complicated to administer than regular defined contribution plans. Unlike proposed plans in which the employer can cease contributions on the basis of estimated annuity income using past market performance (discussed below), they require the employer to make more detailed assumptions about future market performance when establishing contribution rates. In order for a target benefit plan to offer equal benefits to participants starting at different ages or equal benefits adjusted by years of service for those retiring at the same age, its contribution rates must vary by each year of age. The two or three different contribution rates currently used by institutions with defined contribution plans (with increased rates of contribution for older participants) would not achieve this goal. The IRS does not require target benefit plans to meet the same insurance and actuarial valuation requirements as defined benefit plans, but "they have somewhat more complicated annual reporting and initial determination procedures than do [defined contribution plans]" (TIAA-CREF, 1989:5). Incentives to Postpone Retirement Different pension plans create different incentives for faculty who choose to postpone retirement and different costs to colleges and universities that
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education contribute to faculty pensions. Different types of plans can also offer similar patterns of financial disincentives to retire or incentives for postponing retirement. By changing these incentives, colleges and universities may be able to change their faculty retirement patterns. Both defined benefit and defined contribution plans (and hybrid plans) can range from inadequate to generous. In 1989 the average expenditure for pension plans at 4-year colleges and universities was 8 percent of the institution's total payroll (i.e., salary and benefits), with rates varying from less than 4 percent to more than 10 percent. Deductions from employees' pay for required pension contributions averaged 3.3 percent of payroll (TIAA-CREF, 1990). The level of the pension an employee receives depends on the formula of a defined benefit plan and on the amount contributed in a defined contribution plan. Among public institutions with defined benefit plans that set a maximum percentage of salary retirees can receive as pension income, the maximum ranges from 65 to 100 percent. The multiplication factor converting years of service and income to pension benefits ranges from 1.1 to 2.5 percent (Johnson, 1987:4–7). Institutional and faculty contributions to defined contribution plans also vary. Colleges and universities make contributions ranging from 5 percent to more than 20 percent of the salary of the individual faculty member. Some plans, particularly those at some of the research universities at which a higher proportion of faculty now choose to remain employed up to the mandatory age, may yield retirement incomes above preretirement earnings. One such university calculated retirement incomes for a sample of 16 faculty members and found that the median proportion of preretirement salary received as pension income in the first year of retirement would be 84.5 percent if faculty retired at age 68, 95.5 percent at age 70, and 127 percent at age 75. (These calculations do not include Social Security income.) Some faculty and administrators have noted that faculty may regard pension plans generating such high retirement incomes as a source of postretirement wealth rather than of necessary personal and financial support. Individual plans can be more generous to older faculty than to younger faculty. TIAA-CREF (1989:6) found that in 60 of its approximately 1,500 institutional plans (4 percent), the institution contributes a higher proportion of salary for older faculty members. Administrators at two such research universities say that the university instituted its policy of increasing contributions with age to encourage distinguished senior faculty to stay rather than move to other universities. At the other end of the spectrum, both types of plans may leave faculty near retirement age with inadequate expected pension incomes despite the main features of plan design. A faculty member who has had a career at several institutions with defined benefit plans would have a pension income based on short periods of service and, for early jobs, low salaries. An
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education individual expecting an inadequate pension as a result of mobility may postpone retirement on financial grounds. Some defined benefit plans also permit faculty to cash out the proportion of their pension funds they contributed, and some faculty in defined contribution plans have the option of cashing out all or some part of their pension accumulation when changing institutions. Faculty members who spend their pension savings when changing institutions—for example, as a means of buying a house in a more expensive community—may find pension income inadequate for retirement when they reach retirement age. Both types of pension plans tend to reward faculty for deferring retirement. Faculty participating in either defined contribution or defined benefit pension plans can benefit substantially by remaining in employment for an additional year or more. Pensions from defined contribution plans increase annually by the compound interest on previous accumulations, continuing personal and institutional contributions, and the inverse relationship between the level of pension payments and actuarial estimates of remaining lifespan. Table 6 shows the effects on retirement income from a defined contribution plan of 1 or 2 years additional employment. Assuming a high salary, contribution rate, and pension accumulation, we estimate that a faculty member retiring at 70 could have an expected annual pension income of approximately $60,400. If the faculty member retired instead at age 71, his or her annual pension income would be approximately $68,900; if the faculty member retired at 72, the annual pension income would be over $78,300. If a plan does not have a maximum number of years of service that can be included in pension benefit calculations, the pension income of faculty in defined benefit plans with formulas that are based on salary and years worked increases not only with any salary increase, but also with each year worked. With an annual salary increase of 3 percent, a faculty member can increase his or her annual pension benefit by as much as 8.2 percent with an additional year of service. With an annual increase of 5 percent, an additional year's service raises pension income by as much as 10.3 percent (Rees and Smith, 1991). The Employee Retirement Income Security Act (ERISA) reduces the financial rewards of postponing retirement beyond age 70 by requiring workers in private employment to commence drawing pension income accumulated after December 1986 no later than age 70.5. In effect, faculty reaching age 70.5 must begin paying income tax on a portion of their pension savings. Thus, faculty who continue working past age 70.5 draw both a pension and a salary. They can continue to accept pension contributions and to accrue interest on a pension account. In some cases they may be required to continue contributing to their pension funds; however, because the requirement applies annually, they must convert new accumulations to pension
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education income by April 1 of each succeeding year. The requirement limits the financial gain possible from an additional year of employment after age 70. It also creates administrative complications for a faculty member, the institution, and the pension provider. The impact of this effect will increase over time as the number of years of earning after 1986 increases. Many defined benefit plan formulas include a maximum number of years of service that can be used in calculating the benefit (Johnson, 1987:1–16). A faculty member reaching the maximum number of years of service can then increase pension benefits only by receiving salary increases. However, concern over possible age discrimination, ethically if not legally, has led some states that have defined benefit retirement programs to eliminate ceilings on the number of years of service included in pension calculations. A few defined benefit plan formulas set a maximum percentage of salary that an individual can receive rather than specifying a maximum number of years of service (Johnson, 1987). Faculty in defined contribution plans benefit from continued employment through three factors that increase their pension income: compound interest on contributions, actuarial assumptions of a shortening life expectancy, and the opportunity to continue earning institutional pension contributions. Colleges and universities cannot affect the first two factors. The status of the third factor is unclear, although it is clear that age limits are not allowed. Identical provisions in ADEA, ERISA, and the Internal Revenue Code, passed as part of the 1986 Omnibus Budget Reconciliation Act (OBRA), "require continuing contributions, allocations, and accruals in a pension plan regardless of an employee's age" (Irish and Stewart, 1990:4–5). It is unclear, however, whether years of service or total amount of contributions made can be the basis for pension contribution limits. Defined contribution plans have traditionally had no limit on the length of institutional contributions (Irish and Stewart, 1990), although under proposed IRS regulations interpreting OBRA, colleges and universities could "use non-age-based criteria to limit contributions to a defined contribution plan. For example, an employer can arguably limit the amount of benefits, years of service or years of participation" (McMorrow, 1990:33–34). Colleges and universities lack clear legal guidelines or precedents for limiting contributions to defined contribution plans. The IRS is required to solicit comment on its proposed regulations, and the regulations are not yet in final form. Colleges and universities thus cannot be certain that in following and interpreting the proposed regulation they will meet the final requirements. They do, however, have some protection against litigation should the approved regulation differ from the proposed regulation: The preamble to the proposed regulation provides that if the final regulation does prohibit ceasing pension contributions, the rule will be applied pro-
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education TABLE 6 Effects on Pension Income of Working an Additional 1 or 2 Years a. Assumptions Age 70 years and life expectancy 13.6 years Low Medium High Salary $40,000 $50,000 $80,000 Contribution rate 10% 15% 20% Annuity interest rate 8% 8% 8% Present Value of pension account $200,000 $400,000 $500,000 Total annual income from pension $24,175 $48,346 $60,433 b. Gain in account balance and pension income (based on assumptions above) Working 1 Year: Age 71 Years and Life Expectancy 13 Years Working Another Year: Age 72 Years and Life Expectancy 12.4 Years Low Medium High Low Medium High Increase in accumulation from compound interest $16,000 $32,000 $40,000 $17,280 $34,560 $43,200 Additional contributions to pension 4,000 7,500 16,000 4,000 7,500 16,000 End-of-year pension account balance 220,000 439,500 556,000 241,280 481,560 615,200 Change in annual pension income owing to: Change in life expectancy (-0.6) 621 1,241 1,552 755 1,508 1,908 Change in accumulation 1,984 3,967 4,959 2,201 4,403 5,504 Additional contributions 496 930 1,984 496 930 1,984 Total additional income from pension 3,101 6,138 8,495 3,452 6,841 9,396 Total annual income from pension $27,276 $54,484 $68,928 $30,727 $61,325 $78,323 Note: These calculations do not include adjustments for collecting pension income at age 70.5, as requited by the Employee Retirement Income Security Act.
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education pension plan or a plan with a defined benefit component would be taking on the investment risk previously borne by faculty members. Under current federal regulations, colleges and universities that offer defined contribution plans are less able to limit the cost of their pension programs than colleges and universities offering defined benefit pension plans. Because limits to contributions disproportionately affect older faculty, it is unclear whether such limits violate age discrimination law. Although legal violations are, of course, determined by the courts, Congress and the responsible agencies could assist colleges and universities by clarifying the law and regulations governing defined contribution plans. The committee recommends that Congress, the Internal Revenue Service, and the Equal Employment Opportunity Commission adopt policies allowing employers to limit contributions to defined contribution plans on the basis of estimated level of pension income. We recognize that colleges and universities may not be able to design changes to their pension plans, negotiate the workings of proposed changes with faculty as well as pension plan providers, and put changed plans into operation by 1994 when the ADEA exemption for tenured faculty expires. Faculty would not experience the changed retirement incentives in pension plans for many years, because faculty members who are nearest retirement age own pension accumulations that are based on existing plan designs. Colleges and universities could, however, use funds saved by limiting institutional pension contributions to provide other benefits for retired faculty, such as health benefits and programs for retirees. Because health insurance benefits are less expensive when pooled, reallocation could improve the overall package of faculty retirement benefits. The Need for Inflation Protection and Secure Income Approximately one-half of the defined benefit plans that are offered to faculty members include provisions for regular cost-of-living adjustments (Daniels and Daniels, 1990a:6). However, with few exceptions, these are capped at 2–5 percent annually (Johnson, 1987:10–13), with additional increases provided periodically by the state legislature. A National Bureau of Economic Research study of retirees with defined benefit plans from a range of employers found that over the period 1973–1979, the average benefit increased 24 percent while the consumer price index rose 71 percent (Munnell and Grolnic, 1986:6). Annuities from defined contribution plans also provide imperfect inflation protection. TIAA-CREF offers a "graded payment annuity" that initially pays low benefits on the assumption that the annuity will grow to provide for future payments at a low interest rate, then increases the ben-
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education efits each year based on higher actual interest rates. Nominal pension benefits rise over time to give retirees some protection against rising prices. However, graded payment annuities protect retiree incomes from inflation only to the extent that changing interest rates reflect the changing inflation rate. TIAA-CREF also offers a variable annuity based on the performance of their CREF: stock portfolio, but according to Munnell and Grolnic (1986:7), "while the average return on CREF's variable annuity has been relatively high, it has also been extremely volatile; some retirees have suffered serious declines in both the real and nominal values of their retirement benefits." One way to provide inflation protection is through indexed investments. Index bonds—that is, bonds with the coupon payment or repayment of principal indexed to some measure of inflation to guarantee a real rate of return—could provide more effective inflation protection for retirees. In other countries, notably Great Britain, the government has offered these bonds to both pension funds and individual retirees in order to provide an investment vehicle with a guaranteed rate of return. The Canadian government offers pension funds the opportunity to invest in index-linked mortgages as a vehicle for inflation-protected investment to support indexed cost-of-living adjustments (Redway, 1989). The issuer of an index bond guarantees to pay a real rate of return by adjusting for inflation either with coupon payments or the repayment of the principal. Investors can accept a lower guaranteed real rate of return on an index bond than the expected rate of return after inflation on ordinary bonds in exchange for the lower investment risk. If the inflation adjustment is made in the coupon payments, the bond holder receives regular payments that are based on real return plus a percentage equal to average inflation over the period. For example, if the real rate [of return] is set at 3 percent and inflation averages 4 percent, the total annual interest cost would be 7 percent. This approach mimics the current method of compensating the lender for inflation, except that instead of trying to predict inflation at the time of the loan and incorporating this expectation into the stated nominal interest rate. actual observations on price are used to determine annual interest payments (Munnell and Grolnic, 1986:4). This approach provides retirees with a steady real income over the period of the bond. This type of index bond, or an index bond that paid unadjusted coupon payments and repaid the principal adjusted for inflation over the period, could provide an investment vehicle that managers of defined benefit funds could use to provide pensions indexed to inflation (Munnell and Grolnic, 1986). Retirees who convert their defined contribution accumulations to an annuity could also use index bonds for more secure protection against inflation. However, retirees and pension fund managers in this country may not
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education have the option of indexed investments because of uncertainties about how they would be taxed. Investment and tax laws and regulations have not addressed such issues as whether nominal earnings or only real earnings would be subject to income tax. The committee is interested in the possibility of indexed investments as a way to protect faculty retirement incomes against inflation. It also recognizes that such protection could benefit all retirees. The committee believes that further study of indexed investments is needed, and it urges the IRS to examine the costs and benefits of making indexed investments available. We also encourage pension plan providers to consider them as a means of protecting pension incomes from inflation. In the absence of indexed investments, states and colleges and universities offering defined benefit plans could reduce deterrents to retirement by providing retirees with cost-of-living adjustments that more closely reflect the inflation rate. We encourage faculty covered by defined contribution plans to take advantage of annuity payment options designed to adjust for inflation, and we encourage the organizations that administer defined contribution plans to seek better ways to protect pension incomes from inflation. In response to calls for increased flexibility in how annuitants can collect benefits, TIAA-CREF has recently made a number of new options available, among them one that allows colleges and universities to permit their faculty to "cash out" all or a specified part of their CREF retirement funds as a lump sum drawn on retirement. (A standard TIAA-CREF annuity distribution option permits retirees to withdraw 10 percent of their accumulated funds and convert the remaining 90 percent into an annuity.) Some defined benefit plans permit a participant to collect the portion of the pension funds based on the participant's contributions. These options give a retiree the opportunity to control his or her pension accumulation, reinvesting or spending the income. However, in the context of ensuring an adequate pension income over time, allowing faculty to withdraw pension funds at or before retirement is less desirable. Colleges and universities can allow retirees more control over the investment of their pension incomes and ensure a steady income over time by limiting complete cashouts to transfers of accumulations between providers of annuities and by limiting the amount faculty and retirees can withdraw from their pension funds as a lump sum. The committee believes the goal of providing pensions for faculty members is to ensure a continuing standard of living in retirement. It believes colleges and universities can best achieve this goal by providing payments over the course of a retirement. HEALTH BENEFITS Inflation of medical care costs is running 20–22 percent annually (Johnson, 1987:31), and health insurance premiums have risen accordingly. Olders
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education faculty members and retirees report that provisions for health care, financial security, and plans for retirement are the three major factors they consider in deciding whether and when to retire (Gray, 1989; Mulanaphy, 1984). Security in retirement therefore depends not only on an adequate pension income but also on an adequate level of health coverage. There are, however, gaps in most available retiree health coverage. Institutions that offer retirees health benefits that are substantially less than employees' health benefits create a disincentive to retirement. Faculty who consider retirement before becoming eligible for Medicare at age 65 face the prospect of purchasing medical insurance at possibly prohibitive costs unless their institution provides early retirees with health benefits. The 1985 Consolidated Omnibus Budget Reconciliation Act requires employers to offer employees who leave their employment 18 months of continued membership in a health plan, but employers can require an employee to pay the full cost of the premium, and they may also charge an additional 2 percent to cover administrative costs. A 1984 study of early retirement plans at approximately 20 institutions found that most plans did cover an early retiree's full health insurance costs until the age of normal retirement (Covert-McGrath, 1984:13). Although Medicare provides primary coverage for retirees 65 and older, it does not provide coverage as complete as most employees receive, so most retirees want secondary coverage. Some colleges and universities do provide health coverage to all retirees. All U.S. employers and employees face the issue of rising health costs. One of our case study colleges faced a 56 percent increase in the cost of health insurance premiums in 1990. As rising medical costs have far out-paced national inflation rates, many colleges and universities have responded by contributing a lower percentage of health premiums or by reducing the amount of medical coverage they provide. In this situation colleges and universities are understandably cautious about extending health coverage to retirees (Mooney, 1988:A17): "Once established, retiree health care becomes a continuing employer obligation. In effect, health insurance has become a fully indexed benefit that is virtually an open-ended promise to cover health care for life." Chronister and Kepple (1987:43) note that an institution that extends health insurance to a retiree and hires a replacement faculty member must pay double health insurance. Colleges and universities can compare the projected costs of offering health benefits to retirees with the costs of providing health benefits to older employees. Actuaries for one research university estimated that if the population in its employee health care plan were 1 year older, on average, the cost of the plan would be 4 percent higher. On the basis of the high proportion of faculty who retire at 70 at this university, an administrator estimated that the elimination of mandatory retirement would raise plan
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education costs by 2.5 percent. Including retirees in a group health plan would have similar cost effects. Even if retirees pay their own premiums and thus benefit only by access to group insurance rates, their presence in the group raises the premiums paid by the institution and other participants. Most retirement health insurance plans lack coverage for long-term care and catastrophic health care, two of the major sources of health concerns for older Americans. However, for colleges and universities, O'Brien and Woodbury (1988:11–12) note: . . . long-term care insurance is very expensive, perhaps as expensive as all other health benefits combined. Actuarial estimates vary substantially. The cost of providing the [long-term care] insurance and funding the past service liabilities for retirees, current employees, and spouses is estimated to be as much as 5 percent of payroll over 30 years. Under most current group insurance plans for long-term care, employees pay 100 percent of the premiums, usually through payroll deductions. TIAA-CREF offers colleges and universities this type of plan. The cost to employees would be reduced if employers could pay all or part of the premium or if employees could contribute to long-term care premiums with pretax income through salary reductions under Section 125 of the Internal Revenue Code (Gajda, 1989:12). The committee believes that concerns about health costs, like other financial concerns, should not be a deterrent to faculty retirement. The committee recommends that those colleges and universities that do not now provide retirees with medical coverage equal to employee coverage seek ways to improve their retirees' health care coverage by reallocating funds within the institutions' faculty compensation budgets or establishing tax-sheltered savings plans for faculty to save for their own retirement health costs. Colleges and universities can seek ways to improve retiree health care coverage by reallocating funds rather than increasing their total expenditures on benefits. Colleges and universities that cannot afford to provide equal health coverage for retirees and employees may nevertheless be able to reallocate funds to cover some retirement health costs. One case study public research university subsidizes retirees' annual health insurance by the dollar value of the individual's unused sick leave at retirement divided by the individual's life expectancy. Many retirees at this institution have most, if not all, of their health insurance paid by this means, although the plan is less beneficial to retirees with a history of poor health and therefore less unused sick leave. As noted above, institutions that establish a limit to their pension con-
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education tributions could allocate additional funds to retiree health benefits. This has the advantage of redirecting funds accumulated for retiree benefits to a category of retiree need. Colleges and universities with defined benefit pension funds that are larger than needed to cover retiree pensions as a result of investment performance over the past decade could use some pension funds to provide retiree health insurance. Redirected funds, however, are unlikely to cover future liabilities. The Financial Accounting Standards Board has implemented a new requirement that private sector employers providing postretirement medical benefits must accrue an expense against current income to cover the expected future costs of such benefits. Using redirected funds to cover only current retiree health costs leaves the question of future provision unresolved. Colleges and universities unable to fund additional medical benefits for faculty should explore ways to assist faculty in saving for health and long-term care insurance in retirement by organizing tax-sheltered savings plans. Since Medicare is the primary provider for retirees over 65, retired faculty over 65 need only supplemental coverage in order to have total coverage equal to preretirement coverage. Offering tax-deferred savings for retirement health costs, like changing pension plans, is unlikely to have an immediate effect on faculty retirement decisions, since older faculty will have less time to accumulate savings before retirement. Colleges and universities could, however, make retirement a more attractive option by reallocating their faculty benefit budgets to provide better retiree health benefits. The health care cost crisis cannot be resolved entirely within the framework of higher education. The rising cost of medical care creates financial concerns not only for faculty, retired faculty, and institutions of higher education but for people and institutions in all sectors of the economy. Faculty, administrators, and state higher education boards should be active participants in what must be a nationwide discussion and national policy making. CONTINUED FACULTY PERQUISITES FOR RETIREES Many faculty members who are facing retirement are concerned about continuing access to academic life, including opportunities for professional pursuits, office space, clerical support, parking privileges, and other faculty perquisites. In the words of one university task force report sent to the committee: The change to retirement can be enriching and stimulating, but it often is accompanied with fears regarding the loss of identity and purpose. The task force feels that a number of steps can be taken by the University to improve the status and welfare of the emeritus professors. Invitations to
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education colloquia, the continuation of parking and library privileges, the opportunity to teach an occasional course, access to an office, inclusion in departmental social activities, and the opportunity to be undergraduate advisors, all can contribute to the self esteem of retired professors and can add enormously to the intellectual resources of the University. Studies (e.g., Daniels and Daniels, 1990b:75) show that faculty members who are considering retirement are concerned about maintaining some contact with students and colleagues and carrying on research and other professional activity. Rowe found that 40 percent of the retired academics in his study were reemployed, most in teaching or research (cited in Patton, 1979:57). Kellams and Chronister (1988:12) found that 81 percent of retirees listed academic and professional activities among their postretirement activities. They also report "a large number of retirees pursuing academic/professional activities were doing so without remuneration" (Kellams and Chronister, 1988:15). A faculty member whose desire to postpone retirement is not based on financial need may find continued perquisites an attractive retirement incentive. For example, a researcher eligible for full pension benefits may be unwilling to give up access to a laboratory. A teacher ready to slow down may appreciate some advising duties as a way to maintain contact with students. The range of possible perquisites include: office space, library access, administrative support, and computer use; laboratory space and access; inclusion on departmental and institutional mailing lists and invitations to events; participation in departmental administration; retention of principal investigator status; bookstore discounts; faculty club membership; reduced tuition for family members; and even programs that provide retired faculty with temporary or permanent employment. Unlike phased and partial retirement programs, such programs may or may not be academic posts: Felicetti (1982) suggests universities facilitate consulting opportunities for retired faculty by making a brochure for local business contacts or putting older faculty in touch with organizations like the Service Corps of Retired Executives. The California Conference of the American Association of University Professors (AAUP) has listed 39 such benefits in its "Bill of Rights for Emeriti" (Albert, 1986). At one of our case study uncapped public research universities, the estimated costs of providing an active retiree with a 100-square-foot office; free parking; an average of 3 hours of secretarial assistance weekly; $25 in office supplies, photocopying, and postage monthly; and the telephone, library, and computer access provided to regular faculty would total $4,124 annually. The marginal cost of these perquisites can be prohibitive at colleges and universities at which space or services are scarce, costly, or fully utilized. For example, one of our case study urban universities cannot provide parking for all its current faculty and so regards parking for retirees
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education as impossible. Lab space and equipment are costly for all colleges and universities. Colleges and universities seldom calculate the costs of providing retiree benefits (Chronister, 1990; COFHE, 1989; Mauch, 1990). One reason these institutions may be unable to do so is that many perquisites are handled informally on a departmental basis. Benefits for retired faculty tend to depend on tradition and precedent rather than written policies, with decisions about what to allocate to each retiree made on an ad hoc basis (COFHE, 1989; Mauch, 1990). Like ad hoc retirement incentives, this approach has the advantage of flexibility and the disadvantages of potential inequity and uncertainty. Comments from retired faculty during our case study visits suggest that they appreciate formal benefits: One retiree noted that "it's good not to have to rely on being a friend of the dean." Yet faculty also value the opportunity to maintain connections with their department as well as with the university. Retirees and administrators at several of our case study institutions indicated that retirees generally preferred office space in their department to space in areas set aside for retiree offices. At two case study universities that have emeriti centers, retired faculty are organized into an active and activist presence on campus, volunteering in campus activities and special events, attending and offering courses, assisting with retirement counseling, and acting as advocates for older people's interests. The centers are funded by a combination of membership dues and institutional funds. Colleges and universities can ease the transition from employment to retirement for faculty by providing ways for retirees to continue relations with the institution. The benefits offered can vary based on what the institution can afford to provide and the interests of its retired faculty. They need not be part of a formal phased retirement incentive program (discussed in Chapter 5). We believe both retirees and institutions can benefit from continued relations. We therefore encourage colleges and universities that do not already give retired faculty library privileges, list them in directories, keep them on mailing lists, and invite them to occasions such as commencements and receptions to do so. The committee also encourages departments to consider finding ways for retired faculty members to continue to contribute—for example, by sitting on dissertation committees, acting as informal advisers to students or less experienced colleagues, offering lectures or an occasional course, or continuing some research. Allocating scarcer and more expensive benefits such as office and laboratory space will be more difficult. In the likely event that demand for some perquisites will exceed supply, we recommend that colleges and universities develop procedures for allocating these resources. We suggest that, if they are permitted to do so, colleges and universities offer these opportunities to retirees on a renew-
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education able merit basis—for example, 1 year at a time with renewals at the discretion of the department or institution. This approach would allow the department or institution to reallocate scarce resources on the basis of continuing merit, scholarly or teaching contributions, grant or contract renewals, and competing needs. Some universities who estimate that a large proportion of their faculty would postpone retirement beyond age 70 if allowed to do so base those projections partly on the number of retirees over age 70 who maintain an active connection with the university. In many cases departments already provide some office space and arrange for retirees to teach courses or continue research projects. Although older faculty may prefer full faculty privileges to the perquisites available to retirees, they may be willing to accept reduced privileges in exchange for the reduced responsibilities and greater freedom of retirement. When access to colleagues, students, or institutional facilities, rather than financial concerns, leads faculty to postpone retirement, providing continued faculty perquisites to retirees could lead to more retirements and free up institutional resources and faculty positions. RETIREMENT PLANNING A quote from one faculty report on changing retirement policies captures the goal of retirement planning for colleges, universities, and individual faculty members (Holland, 1988:12): ''The objective should be to convert retirement from what is an undesired (and virtually unforeseen) catastrophe, to a more meaningful and acceptable stage of academic life.'' To the extent that retirement planning assistance makes retirement a familiar and normal career prospect, colleges and universities can make retirement a more attractive option for faculty. Increased faculty options, ranging from the opportunity to continue working beyond age 70 to choices resulting from retirement incentives or changed retirement policies, may make individual planning more difficult and increase faculty members' needs for formalized planning assistance and retirement counseling. TIAA-CREF surveys have found a positive correlation between faculty retirees who reported satisfaction with retirement and those who reported they spent time planning for financial security and substantive activities in retirement. This correlation could be due to self-selection, if faculty who already regard retirement positively are more likely to plan for it. Nevertheless, evidence from our case study visits suggests that the availability of competent and personalized planning assistance can relieve faculty worries about retirement. The benefits offices at two public research universities, one uncapped and one capped, offer regular seminars on retirement and financial planning; the latter seminars include a component on pensions as a way of providing retirement information to younger as well as older faculty.
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education Benefits office staff also provide faculty with individual retirement counseling, opportunities to talk to retired colleagues, and help in coordinating the paperwork associated with retirement. Some smaller institutions also provide planning assistance. At one case study liberal arts college, the dean discusses career goals, which can include plans for retirement, with all faculty members. The college has used part of a grant from a private foundation to fund outside financial consultants for faculty members who mention an interest in financial planning for retirement; administrators decided that outside consultants would be independent of institutional bias. Faculty members are free to choose any consultant, although the dean will provide a list of reputable firms that have been used in the past. One private research university task force recommended that the university provide a financial incentive to encourage faculty to plan for retirement. It recommended that the university contribute to financial planning twice in the career of all long-term employees, and it proposed a salary bonus equal to one-half of a year's salary to any faculty member between ages 59 and 67 who declared retirement plans 3–5 years in advance. The task force concluded this bonus "is sufficiently large to cause faculty to think about their retirement plans." Colleges and universities as well as individual faculty members benefit from coordinated and visible retirement planning programs: Faculty members are more likely to plan for retirement when they receive assistance, and colleges and universities that help faculty plan for retirement have an opportunity to monitor retirement concerns. They can use the resulting awareness of retirement plans and needs to improve both retirement programs and projections of faculty supply and demand. The committee recommends that, in order to make retirement a more familiar and normal career prospect, all colleges and universities assist their faculty in planning for retirement. Since some retirement concerns have to do with specific institutional retirement policies and benefits, adequate retirement planning assistance requires more than an annual visit from a pension plan representative. At a few case study institutions, a dean or a retirement planning coordinator works with retirement plan providers to ensure that faculty know about their retirement options throughout their careers; faculty are able to consider retirement options in the context of their individual needs; and faculty are able to benefit from others' experience with retirement. But at most of our case study colleges and universities, there is no one person or office to contact for information on retirement; at some, faculty do not even know which offices handle retirements and retiree benefits. Retirement planning could supplement each of the policy changes dis-
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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education cussed in this chapter. Additional financial information assists faculty in determining the adequacy of their pension incomes and other retirement benefits, including health benefits and income from retirement incentive programs. Nonfinancial counseling can increase faculty awareness of retirement options, including programs and perquisites for retirees. Retirement counseling can also assist colleges and universities in developing retirement policies. Both financial and nonfinancial planning assistance may make retirement more attractive by making it less of an unknown state. Retirement benefit policies—pension plans, health benefits and continued faculty perquisites for retirees, and retirement planning assistance—can affect faculty retirement decisions. Colleges and universities may be able to increase faculty turnover by changing these policies. Faculty and administrators can also consider changes in these policies to address institutional concerns about increasing costs and individual concerns about retirement security. Colleges and universities seeking ways to increase faculty turnover, including those that may suffer reduced turnover if mandatory retirement is eliminated, may also want to consider policies specifically designed to encourage faculty retirements. We address retirement incentive programs in the next chapter.
Representative terms from entire chapter: