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Faculty Retirement Incentives by Colleges and Universities

May 2004
Working Paper
03-028
By  John Pencavel
The end of mandatory retirement of college and university faculty in 1994 and the increased employment of older faculty have caused these institutions to devise policies to induce their older faculty to relinquish their tenure status. What policies do colleges and universities use to affect the employment decisions of their tenured faculty? What is known about the effectiveness of these policies? This is the purpose of this paper.

Special attention is given to phased retirement programs and buyout programs. The incidence of these two programs is greater in institutions with a pension program that is of the Defined Contribution type. This is consistent with arguments suggesting that institutions with Defined Contribution pension programs are those in greater need to devise incentives for faculty to retire. Research universities are also more likely than other colleges and universities to have offered a buyout program and to have implemented a phased retirement program.

A case study is examined of the largest buyout program, the voluntary early retirement incentive programs (VERIPS) used by the University of California in the first half of the 1990s. These experiences testify that large reductions in faculty employment can be effected. However, the cost of these buyouts are very difficult to forecast even though there is little evidence of an adverse selection problem.

The costs imposed on colleges and universities by the end of mandatory retirement have been manageable and the programs to induce the retirement of older faculty have been sufficiently effective that these institutions have not been motivated to undertake more fundamental changes in the nature of tenured employment contracts in higher education. One reason for this is that the adjustments have been borne by those who are neither tenured nor on the tenure track.