Ending Mandatory Retirement for Tenured Faculty The Consequences for Higher Education (1991) / Chapter Skim
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4 PENSIONS, RETIREMENT PROGRAMS, AND COSTS
4 PENSIONS, RETIREMENT PROGRAMS, AND COSTS
Pages 67-90
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From page 67... ...
Colleges and universities need to balance the goal of providing for retired faculty with other objectives: presenting 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 67
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From page 68... ...
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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From page 69... ...
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)
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From page 70... ...
. The two major types of pension plans provided by colleges and universities in the United States are defined contribution plans and defined benefit plans.
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From page 71... ...
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 asso_iated 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.
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From page 72... ...
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.
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From page 73... ...
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 Edefined contribution plans]
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From page 74... ...
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.
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From page 75... ...
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 Mom 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.
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From page 76... ...
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.
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From page 78... ...
Defined contribution plans allow institutions to calculate pension costs with greater certainty than for other plans because costs are determined by a set rate of contributions. Target benefit plans have the disadvantage of having to satisfy more IRS requirements than do ordinary defined contribution plans, but they can save money for institutions and reduce the disincentives to retirement found in an ordinary defined contribution plan.
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From page 79... ...
However, institutions that offer standard defined contribution plans are less able to limit inadvertent incentives to postpone retirement. Opportunities for colleges and universities to limit pension income are restricted by the uncertain legality of capping contributions to regular defined contribution pension plans and by institutions' lack of experience with such options as target benefit plans or plans with both defined benefit and defined contribution components.
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From page 80... ...
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.
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From page 81... ...
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.
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From page 82... ...
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.
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From page 83... ...
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.
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From page 84... ...
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.
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From page 85... ...
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.
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From page 86... ...
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)
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From page 87... ...
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.
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From page 88... ...
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.
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From page 89... ...
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.
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From page 90... ...
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 assistancc can affect faculty retirement decisions.
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