February 20, 2009

Universities eye professor retirements as way to reduce costs in troubled economy

As they search for ways to cut costs in the face of shrinking endowments, many universities are implementing policies to encourage their oldest and highest paid staffers and faculty into retirement.

Dartmouth and Harvard are among those that recently offered eligible staffers incentive packages, which may look attractive compared to the possibility of layoffs. Yale University is considering early retirement incentives for tenured faculty, a program similar to the one that the University of Chicago has had in place for nearly 15 years.

“In the current economic climate, organizations are looking for alternatives to firing people,” said Allen Sanderson, economics lecturer. “With retirement incentives, they are saving money, and it helps on the morale front because people voluntarily took the buyout.”

Harvard’s offer would provide staffers with a lump sum equal to one year’s salary, a “bridge benefit” of $750 per month until social security eligibility begins at age 62, and would loosen qualification standards for retiree medical coverage. Of the 3,500 staffers, about 1,000 are eligible for the offer.

Harvard spokesman Kevin Galvin said that it is too early to tell how many individuals will choose to take the buyout and how much of an impact it will make financially.

“Our planning assumes that our endowment will drop by 30 percent in value for this year, and we need to make significant changes to adjust to our new fiscal reality,” Galvin said.

The package could trim costs in the long term, as many of the eliminated positions are unlikely to be refilled, according to Chicago Booth professor Gary Becker. Secretarial positions, for example, are becoming less necessary as increased internet use allows people to become their own secretaries.

The University of Chicago’s early retirement incentive program for faculty began 15 years ago when the federal government outlawed the imposition of a mandatory retirement age. The program gives a bonus and waives medical insurance premiums for faculty who retire between the ages of 65 and 70, and also pays older faculty who work half time at a higher wage rate.

According to The Chronicle of Higher Education, the average age of retirement in the general population is 62, but the average in academia is 66 and drifting upward. They found that about one-third of the academics who responded to a survey expected to retire at age 70 or later. Particularly at top research universities where aging professors have manageable workloads, limited teaching responsibilities, and are invested in research that they enjoy, faculty are less inclined to retire.

Early retirement incentives, which increase turnover and make room for younger faculty, are not without complications. When early retirement incentives are offered, legally they have to be presented to all who are eligible. Ideally, universities want to retain faculty who continue to do quality work, but there is no way to distinguish between the productive and unproductive faculty in the retirement incentive process.

“You have to strike a balance,” Becker said. “The number of people that take the buyout depends on how generous the buyout is. If you can hit the right people then it is good to free up space, but you don’t want to loose the valuable ones.”

But universities have successfully implemented this strategy before. Universities such as Harvard and Standford implemented retirement incentives for staff during a similar economic downturn in the 19911992 academic year.