5
Retirement Incentive Programs

Retirement incentive programs, unlike retirement benefit program (discussed in Chapter 4), are specifically designed to encourage faculty turnover, typically by offering part-time employment or payment in exchange for an agreement to retire. Over the past decade some colleges and universities have offered retirement incentive programs to faculty in response to the 1977–1982 change in the mandatory retirement age from 65 to 70, when states eliminated mandatory retirement, and in some cases in anticipation of the possible nationwide end of mandatory retirement. Colleges and universities instituted these plans to deal with faculty turnover issues specific to the campus, the state higher education system, or all public employees.

Both colleges and universities and faculty members can benefit from retirement incentives programs. Colleges and universities can offer these programs to increase faculty turnover in specific areas for a limited time. Faculty members can accept retirement incentive programs as a means of making up for fewer years of accumulating pension benefits and of making a gradual transition to retirement.

Colleges and universities that consider offering retirement incentives face several issues: which type of program will be attractive to faculty not otherwise planning to retire, what will be the cost of offering a program, what will be the legality of different program designs, and whether to restrict incentives to particular individuals or groups of faculty. In this chapter the committee considers these issues, particularly in light of the possible elimination of mandatory retirement.

TYPES OF FORMAL PROGRAMS

The Commission on College Retirement estimated that in 1985 25–30 percent of American colleges and universities had begun offering a wide



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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education 5 Retirement Incentive Programs Retirement incentive programs, unlike retirement benefit program (discussed in Chapter 4), are specifically designed to encourage faculty turnover, typically by offering part-time employment or payment in exchange for an agreement to retire. Over the past decade some colleges and universities have offered retirement incentive programs to faculty in response to the 1977–1982 change in the mandatory retirement age from 65 to 70, when states eliminated mandatory retirement, and in some cases in anticipation of the possible nationwide end of mandatory retirement. Colleges and universities instituted these plans to deal with faculty turnover issues specific to the campus, the state higher education system, or all public employees. Both colleges and universities and faculty members can benefit from retirement incentives programs. Colleges and universities can offer these programs to increase faculty turnover in specific areas for a limited time. Faculty members can accept retirement incentive programs as a means of making up for fewer years of accumulating pension benefits and of making a gradual transition to retirement. Colleges and universities that consider offering retirement incentives face several issues: which type of program will be attractive to faculty not otherwise planning to retire, what will be the cost of offering a program, what will be the legality of different program designs, and whether to restrict incentives to particular individuals or groups of faculty. In this chapter the committee considers these issues, particularly in light of the possible elimination of mandatory retirement. TYPES OF FORMAL PROGRAMS The Commission on College Retirement estimated that in 1985 25–30 percent of American colleges and universities had begun offering a wide

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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education range of retirement incentive programs designed to encourage faculty to set a retirement date in exchange for a reduced teaching load, retirement incentives, or both (Watkins, 1985:21). According to our case studies and letters from faculty and administrators, and the literature on retirement incentive programs for faculty, the characteristics of the programs vary: Most plans require a minimum number of years of service for eligibility; that number ranges from 10 to 20 years, usually including time spent on sabbaticals but not leave without pay (Covert-McGrath, 1984). Most plans are open only to tenured faculty. For plans that limit faculty participation on the basis of age, the ages of eligibility vary: for example, 50–65, 55–70. Many programs require faculty to set a specific retirement date. Some programs require faculty to apply 90 days to 1 year before their desired retirement date, but others require as much as 4–10 years notice. Most plans cover full health benefits until retirees reach age 65 (i.e., the age of eligibility for Medicare). Common additional benefits offered include disability benefits, medical plan membership, tuition benefits for the retiree and his or her dependents, free admission to campus activities, a one-time lump sum payment in addition to severance pay, and preretirement planning assistance. More broadly, retirement incentive programs can be differentiated by whether they offer part-time employment or require full retirement. Two types of programs offer faculty the opportunity to work part time before fully retiring (see Chronister and Clevenger, 1986a): In partial retirement programs faculty members draw pension benefits while returning to work part time. In phased retirement programs retirement plan contributions continue during the period of part-time employment, and program participants draw their retirement benefits only after full retirement. For example, a college or university could allow its tenured faculty to work half time at half salary in exchange for an agreement to fully retire at the end of 3 years. Retirees in a partial retirement program can use the income from part-time employment to supplement pension payments that have been reduced by fewer years of pension accumulation and a longer life expectancy. Retirees in a phased retirement program do not draw their pension income and have only part-time earnings during the phased retirement period. Colleges and universities can supplement the part-time income with supplemental annuities or lump-sum payments. In some programs the institution guarantees that participants can continue to work as long as they wish, provided that they notify the administration each year of their intentions to work part time for an additional year.

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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education In other programs participants agree to full retirement after a fixed number of years of part-time work. Some programs at colleges and universities with a mandatory retirement age permit faculty to work part time until they reach the mandatory retirement age. By offering a program that includes a fixed retirement date, colleges and universities decrease uncertainty about when faculty intend to retire. Our case studies of institutions with programs that do not limit the number of years of reemployment suggest that partly retired faculty find retirement attractive: Most faculty who work part time choose to retire completely after 2 or 3 years (see also Chronister and Clevenger, 1986a). Trial retirement is another alternative to full retirement. Colleges and universities can permit faculty members to return to full-time employment after a trial period of retirement or apply lenient leave-of-absence policies to faculty members who are considering retirement. Some colleges and universities allow a semester's or year's leave of absence with full or half pay, or leave without pay, to faculty who are unsure about whether they are ready to retire (Spreadbury, 1984:16). Like phased and partial retirement programs, trial retirement allows faculty to cut back professional commitments without completely giving up employment. The opportunity to try retirement without relinquishing one's job can be a retirement incentive for faculty who are already eligible for a full pension or would be eligible after the period of leave. Trial retirees may find they like retirement and choose not to return. One of our case study institutions reported that few faculty who took trial retirement subsequently returned to employment. Full retirement incentive program offer a range of benefits in exchange for an agreement to retire. Most programs include financial benefits, such as lump-sum severance payments or additional credit in a defined benefit pension plan, offered at a flat rate or on the basis of age, salary, length of service, or some combination of these; annual payments from the institutional budget equal to fall preretirement salary or a percentage of it, which can be based on age, salary, or service; and institutional purchases of supplemental annuities. These financial benefits can provide retirees with the additional income needed for a longer period of retirement and make up for earlier than anticipated end of contributions to the regular pension plan. From a faculty member's perspective, incentives to full retirement can make earlier retirement financially possible. Chronister and Trainer (1985:193) describe "bridging programs," which offer retirees an income to bridge the gap between the last year of employ-

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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education ment and the first year of eligibility for full retirement benefits. This permits retirees to put off collecting their regular retirement annuity rather than trying to make the accumulation in a defined contribution program last for a longer number of years. Some colleges and universities provide additional benefits as part of retirement incentive programs. Covert-McGrath (1984:15) found that some colleges and universities paid for or subsidized retirees' medical benefits and life insurance coverage. In most cases these benefits ceased at age 65, when retirees became eligible for Medicare, or at the mandatory retirement age. COSTS AND BENEFITS OF FORMAL PROGRAMS Retirement incentive programs may not save money if some participating faculty members might have retired anyway at no additional cost to the institution. For example, a program could provide a faculty member who had always intended to retire at 62 with a financial bonus for doing so. Administrators can compare the cost of incentive payments to the salaries and benefits program that participants would have received had they not retired, but there is no clear way to estimate when participating faculty would have chosen to retire in the absence of an incentive. Our case studies and discussions with benefits and finance administrators suggest that at least some colleges and universities are modifying or cutting back retirement incentive programs that proved more costly or less successful than expected. However, other colleges and universities have found budget-neutral ways to offer retirement incentive programs—for example, by spending funds from an overfunded defined benefit pension plan on financial incentives to retirement. The Consortium on Financing Higher Education found, in a 1987 survey of its member colleges and universities and a set of public universities, that the reported savings or costs of retirement incentive programs ranged from $2 million saved from eight retirements to programs designed to break even and to estimated costs of $60,000–$500,000 per year. One college commented that "the staffing flexibility feature far outweighed the additional expense" (Consortium on Financing Higher Education, 1987:46–52). Surveys have shown not only that many faculty like the idea of part-time retirement but also that phased and partial retirement programs are the only incentive programs that appeal to faculty who report they are not planning to retire in the near future (Carlson, 1990:35; Patton, 1979). Consequently, plans involving part-time employment may be more likely than other retirement incentives to encourage faculty to retire sooner than they otherwise would have. These options have the potential to benefit the institution by continuing to utilize the talents of senior faculty and permitting the institution to plan

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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education effectively [for faculty retirements]. They have the potential to benefit faculty by providing mental stimulation, the opportunity to continue to interact with colleagues and students and a financial and psychological transition into full retirement (Daniels and Daniels, 1989:38). Phased and partial programs can provide financial benefits for both faculty members and institutions. At one institution faculty in the partial retirement program receive a pension equal to approximately one-half of their preretirement salary in addition to earning 40 percent of their preretirement salary for part-time employment. When this income is supplemented by Social Security and any tax benefits resulting from a lower taxable income, some retirees earn more than they did when fully employed. Moreover, the institution saves 60 percent of the faculty member's salary (Chronister and Clevenger, 1986b). Some colleges and universities use such savings to hire new faculty at lower salaries. The cost of supporting a partial retiree varies depending on whether the partial retiree needs an office, secretarial services, and other perquisites for part of a year or year round. The savings from a partial retirement may not always be enough to fund hiring a replacement for the retiree. Colleges and universities can offer incentives to full retirement in the form of severance payments, supplemental annuities, or any payment in exchange for an agreement to retire. Some colleges and universities offer additional salary or pension benefits to faculty members who agree to retire in a specified number of years. For example, a faculty member agreeing to retire in 5 years could receive a bonus payment or 5 years of additional service credit in a defined benefit pension plan. Poorly constructed programs, however, can result in costly and inefficient strategies, such as paying 2 years' worth of salary as a retirement incentive to faculty members who had already intended to retire in 2 years or less or encouraging more faculty members to retire than the institution is able to replace. Patton (1979:187) found that the offer of a payment equal to 1–2 years' salary in exchange for agreement to retire appealed to a large number of employees, but primarily to those who reported that they intended to retire within 1 or 2 years. The 1986 Tax Reform Act complicated financial incentives to full retirement by requiring employees to pay taxes on severance pay or the amount of a supplemental annuity in the year of retirement rather than spreading the payments over the course of retirement as the income is received. Colleges and universities may need to cover part or all of the additional tax cost in order to make full-time early retirement attractive under the new regulations. Two universities calculated this would cost approximately 20 percent of the original bonus figure. One case study uncapped public research university ameliorates tax disincentives by paying a lump-sum incentive in two installments spread over the academic year so as to fall into two tax

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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education years, with the amount of the second installment (paid in the first full year of retirement) set below the maximum outside income permitted for full Social Security benefits. Some administrators fear that offering a retirement incentive may lead productive faculty to choose early retirement while unproductive faculty or faculty in overstaffed departments do not retire. Faculty who are considering positions elsewhere might accept an offer of a supplemental annuity or lump-sum payment that is too small to make up for lost pension or salary income, while employees actually planning to retire would find such an offer less attractive (Patton, 1979:192). In a review of discrimination law related to retirement incentives, McMorrow (1990:19) concludes that a plan may offer retirement incentives to only a subset of an institution's employees as long as nondiscriminatory factors explain the exclusion. There are at least four ways that current retirement incentive plans limit participation. First, programs may target specific departments. One university calculated overstaffing in its departments and gave members of the most overstaffed departments priority in participating in a retirement incentive program (Chronister and Clevenger, 1986:29). Second, incentives are based on salary. A lump-sum payment based on the mean salary of all faculty offers, in effect, a greater proportion of income to low earners than to high earners. Stanford University offered a program that linked the level of the incentive payment an individual would receive to the median departmental salary "on the assumption that salary level is an indication of quality" (Chronister and Kepple, 1987:31). Third, some institutions retain the right to deny participation to individuals or to delay their participation. One university reserves the right to delay its acceptance of a faculty member's statement of intent to participate in the early retirement program by up to 12 months. It exercises this right when unable to find a replacement for the early retiree (Chronister and Clevenger, 1986a:12). One of our case study uncapped public universities retains the right to reject some faculty who apply for its incentive program in order to keep program costs at or below a statutory percentage of its personnel budget. Selection is based on a formula using age (for cost-justified reasons), years of service, salary history (positive for those receiving lower raises), and an additional optional factor to account for "management needs." Fourth, institutions limit participation based on age. The 1990 Older Workers Benefit Protection Act made it clearly legal to set a minimum age for participation in retirement incentive programs. It also made it clearly legal to provide "bridge" payments until retirees are eligible for Social Security, effectively limiting an incentive to employees under age 65. One of our case study public universities set a maximum age for participation in

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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education its retirement incentive program after initially opening the program to all employees under a grandfather clause. The university developed this program in consultation with the state attorney general (although in recent legislation Congress did not clarify the legal status of upper age limits for participation). Colleges and universities can avoid offering retirement incentives to faculty more likely to retire anyway by offering plans that provide younger employees with benefits equal to those received by older employees (McMorrow, 1990). For example, colleges and universities with defined benefit plans can offer retirees over age 60 benefits equal to those they would have received at age 65, rather than making the usual actuarial reduction of their pension income. Such an offer gives nothing extra to employees already aged 65 or older. As noted above, the legal status of offering younger employees benefits that are denied to older employees is less clear. Colleges and universities that offer retirement incentive programs must be careful to ensure that their programs are legal. Under ADEA, an employer found guilty of age discrimination is liable for damages equal to double the affected employees' lost wages if the court finds the violation of ADEA "Willful"—that is, showing "reckless disregard for the legality of its acts" (McMorrow, 1990:3–4). Courts have rejected plans when they found provisions too complicated for participants to understand, when employers failed to give employees sufficient time to consider the offer, and when employees were pressed into decisions (McMorrow, 1990:43–44). Administrators can change or withdraw retirement incentive programs that are not offered as employee benefit programs. Colleges and universities can distinguish a program from ongoing employee benefit programs by offering it for a limited time period or to a limited number of employees. Colleges and universities have offered retirement incentive programs limited to periods ranging from 1 month to 1 year. For example, one college "established a five month window during which faculty could contract for an immediate or deferred early retirement" in exchange for severance payments based on age at retirement (Chronister and Clevenger 1986b:8). Legal guidelines are unclear for programs not classified as employee benefit plans. Some administrators are concerned that any ongoing retirement incentive program may be classified as an employee benefit and therefore as an expensive liability under ERISA funding requirements. Classification of retirement incentive programs as employment benefits also raises legal questions of discrimination regarding whether colleges and universities have to extend the program to nonfaculty employees. In some cases colleges and universities are considering whether to discontinue programs that they cannot afford either to fund as faculty benefits or to extend. State laws also affect plan design. For example, some states (e.g., Washington) forbid public institutions to pay people for services not ren-

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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education dered, thereby ruling out the use of state funds for severance payments, although phased and partial retirement programs are permitted. Other states (e.g., Ohio) prevent public employers from guaranteeing reemployment (including part-time employment) to retirees: Any partial employment after a retiree begins drawing pension benefits must be arranged after retirement, so faculty members must agree to retire full time and gamble on being reemployed (Chronister and Kepple, 1987:49). Some public institutions have had difficulties with state retirement incentive programs designed for all state employees. At one public case study university, faculty who wanted to accept a state retirement incentive were required to make their retirement decisions over the summer, after teaching assignments had been arranged, and to retire by a date in the middle of the semester. The university then had to scramble to adjust course offerings and faculty assignments. The committee recommends that states offering retirement incentive programs to all state employees consider the impact of the program on state institutions of higher education and consider program designs or exceptions in program rules to avoid disrupting state colleges and universities. INDIVIDUAL BUYOUTS Colleges and universities have traditionally arranged retirement incentives for individual faculty members on an ad hoc basis when the goal was to retire a specific individual. This method enables colleges and universities to obtain a desired retirement without any risk of the incentive attracting more productive individuals. It also allows the selected faculty member to negotiate an incentive tailored to his or her individual needs, such as health insurance benefits, a lump-sum payment, or continued university housing (Chronister and Kepple, 1987). However, individually tailored offers can be less beneficial to faculty: Offers limited to selected employees can favor those in a better bargaining position or those who are simply more adept at bargaining. The variable nature of both the benefits and the selection of participants can lead to legal problems for colleges and universities. If the criteria are informal, an institution has less defense against a charge of discrimination. In particular, participation in programs must be voluntary to be legal, and targeted individual buyouts may not meet this criterion if the first approach is made by the institution to the individual rather than vice versa (Chronister and Kepple, 1987; McMorrow, 1990:45–46). Colleges and universities that offer individual retirement incentives can lessen the risk of a lawsuit by making the offer a matter of individual choice; by allowing the potential retiree time to consider the offer, as with formal retirement incentive pro-

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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education grams; and possibly by asking individuals to waive their right to a legal challenge of the agreement. Waivers have the advantage of putting the ''employee on notice of the existence of federal and state age discrimination law, indicating that the employee is making a knowledgeable decision'' (McMorrow, 1990:46–55). Individual buyouts could create perverse incentives for nonperforming faculty to stay on in hopes of being bought out. This has harmed the collegial atmosphere at some colleges and universities. The University of Minnesota Mandatory Retirement Task Force (1989:7) states: If the case is one in which discharge is appropriate, the use of major economic resources to save the unit head from the turmoil of discharge proceedings may not be justified. Furthermore, productive members of the department are outraged by the use of large resources in problem cases; the message delivered is that to get these resources you need to become a problem case. Individual buyouts are most appropriate when used with sensitivity to faculty members' sense of equity. When faculty members voluntarily agree to the incentives offered, individual buyouts can be an effective way of encouraging faculty to retire. CONCLUSIONS AND RECOMMENDATIONS Retirement incentive programs, which have been widely used in higher education, can significantly affect faculty retirement behavior. Colleges and universities can offer retirement incentive programs for fields or department in which turnover is most needed and can limit participation to control both turnover and costs. Because acceptance of a retirement incentive must be voluntary, these programs create additional retirement options for faculty—not forced retirements. These programs can offer faculty financial benefits and the opportunity to make a gradual transition to retirement. Whether these plans are money savers for the institution or are a way of exchanging a retirement problem for a financial one will vary with the circumstances of the institution. The committee concludes that retirement incentive programs are clearly an important tool for increasing turnover and one that must be considered by any college or university concerned about the effects of retirement. The committee emphasizes that retirement incentive programs and individual retirement incentive contracts must be entered into freely and without coercion, when seen by both the institution and the individual as beneficial. Although it is unlikely that colleges and universities would tie a retirement agreement to the granting of tenure, in order to avoid the possibility of coercion, we believe colleges and universities should limit offers

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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education of retirement incentive programs or individualized retirement incentives to tenured faculty. It is inappropriate to offer retirement incentives to faculty being considered for tenure. The committee recommends that states and colleges and universities that offer retirement incentives to all employees develop ways to protect faculty who are being considered for tenure from possible coercion. It is also inappropriate to ask a faculty member to decide whether a retirement incentive offer would be beneficial when retirement is only a remote prospect. The committee recommends that colleges and universities offer retirement incentive programs and individual retirement incentive contracts only to faculty who are ready to consider seriously when to retire. Retirement incentive programs now used in higher education are commonly designed for faculty in their 60s. By extending participation in retirement incentive programs to faculty aged 50 or over, colleges and universities could benefit by increasing faculty turnover and in planning for faculty retirements. We believe 50 would be an appropriate minimum age. The committee recommends that colleges and universities offer retirement incentive programs and individual retirement incentive contracts only to tenured faculty age 50 and over. In the 1990 Older Workers Benefit Protection Act, which extended employee protection against age discrimination, Congress clearly permitted retirement incentive programs that include a minimum age for participation, are offered for a window of time, and provide bridge payments made until retirees are eligible for Social Security. However, the legal status of some features of retirement incentive programs may still need clarification; Congress and the responsible federal agencies could assist colleges and universities by clearly preserving several options. The committee recommends that Congress, the Internal Revenue Service, and the Equal Employment Opportunity Commission permit colleges and universities to offer faculty voluntary retirement incentive programs that: are not classified as an employee benefit, include an upper age limit for participants, and limit participation on the basis of institutional needs. Retirement incentive programs give colleges and universities the opportunity to offer a policy aimed directly at changing a particular aspect of faculty retirement behavior. For example, colleges and universities concerned about decreased turnover during a transition period following the elimination of mandatory retirement could offer retirement incentive pro-

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Ending Mandatory Retirement for Tenured Faculty: The Consequences for Higher Education grams limited to the projected transition period. Colleges and universities wanting to increase turnover in a particular school or department could give the faculty in that school or department priority in accepting incentives. However, colleges and universities that are considering retirement incentive programs need to plan carefully to design a program that is appropriate to faculty and institutional needs, including the needs to support new fields, allocate resources wisely, and respond to faculty concerns about retirement. Congress could assist colleges and universities in this effort by ensuring that a wide range of options is available.

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