Apr 04, 2002

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vol. 23, no. 7

If Canadian universities wish to compete with U.S. universities for talented faculty members, they may have to offer market differentials to compensate for the costs of compulsory retirement.
By Charles Crawford
“In those cases where external market conditions suggest that a salary
higher than that appropriate for academic achievement and previous experience is warranted, a market differential will be added to a faculty member's base academic salary.”(SFU salary policy, emphasis added).

Universities provide market differentials to attract faculty members to departments such as business administration and computer science because these departments must compete with business and industry for talent. There are rumours that some departments are paying new faculty more than their top of the scale senior professors.

In this piece, I argue that if Canadian universities wish to compete with U.S. universities for talented faculty members they may have to offer market differentials to compensate for the costs of compulsory retirement. These differentials, I argue, can be perceived either as the costs of clearing the dead wood out of Canadian universities or as additional costs due to restricting the market forces regulating professorial salaries. I begin with the story of my friend Bob who is a professor of political science at a private U.S. university that is similar to Simon Fraser in many ways.

Bob plans to continue his teaching and writing until he is 70. Hence, he will work and receive a salary for five more years than a typical Canadian faculty member who I shall call Mike. These years will be at the top of the salary scale. Let's assume Bob and Mike are both at the top of the their salary scales at age 65 with an annual salary of $100,000 Canadian per year. Bob will therefore take home $500,000 more in lifetime salary earnings than Mike. Moreover, since his pension does not start until he is 70, Bob will have five more years to accrue retirement savings than Mike. Let's assume both have $800,000 in Canadian dollars in their pension accounts at age 65. If it produces a return of 10 per cent (the long term gain for the SFU pension plan) Bob will have $1,288,408.00 in his pension account at age 70. Moreover, if Bob's university continues to contribute $10,000 per year to his pension plan and it is invested at 10 per cent he will have an addition of $61,051 in his pension account, for a total of $1,349,462. This is ($1,349,462 - $800,000) = $549,462 more than Mike. Finally, Bob will have $500,000 + $549,462 = $1,049,462 ($1 million to keep the arithmetic simple) more lifetime earnings than Mike. Of course Bob must work five more years than Mike.

Now, let us look at how much more a year Mike would have to earn in each of his 35 years at a typical Canadian university to obtain the same lifetime earnings as Bob in his 40 years. I calculate this by computing how much Mike would have to invest each year to have the $1,000,000 at the end of 35 years. I assume a 35-year constant growth rate of 10 per cent to obtain $3,689.00 per year. This is my estimate of the yearly retirement differential that a Canadian university may have to pay a faculty member who spends 35 years at a Canadian university to provide the same life time earnings as would be obtained in 40 years in an American university.

Many factors will influence the actual size of the retirement differential. One is teaching load. Faculty members at universities with high teaching loads tend not to work past age 65. Another is discipline. Professors in the humanities remain productive to an older age than those in the physical sciences. Therefore, they may be tempted to continue to work after age 65. This will raise the size of their retirement differential.

An important factor is age at which the opportunity to take a position in a university without compulsory retirement occurs. To see this, note that since the $1,000,000 comes at the end of employment period, it is a constant irrespective of how long a faculty member is employed. Suppose a 45-year-old professor gets an offer from a university without compulsory retirement and the faculty member believes he or she can be productive until age 70. The yearly differential will be $17,459 per year. If the offer comes at age 50 the differential will be $31,473 per year.

These computations indicate the benefits to individual faculty members of taking an academic position in institutions without compulsory retirement. But surely, these same computations indicate that universities benefit from compulsory retirement. After all, U.S. universities are paying high-end salaries to old codgers that Canadian universities do not have to pay.

Let us assume free trade in faculty members. If Canadian universities are to recruit and retain top-level faculty members, they will have to offer lifetime compensation that rivals that which faculty can obtain if they take U.S. academic positions. One can think of this amount as a retirement differential that Canadian universities will have to pay to keep faculty from taking American positions. As I claimed earlier, many factors will influence the size of this differential. My rather rough computations indicate that it might be as high $3,689 per year for new PhDs. who begin work at age 30 and who believe they might be productive until age 70. The older a faculty member is when full time academic work begins, the greater is the benefit of taking a position without compulsory retirement.

Now let us suppose that the retirement differential is sufficiently large that Canadian and U.S. faculty members obtain the same lifetime earnings. Canadian and U.S. universities will pay out the same lifetime earnings to each faculty member, but U.S. universities will obtain more years of service for the same payout. It is possible that compulsory retirement is not the bargain for Canadian universities that many believe it to be?

There are several ways of thinking of the retirement differential. Some might think of it as a cost that Canadian universities, and the taxpayers that support them, pay to avoid accumulating the dead wood of older faculty members. Some will object to this claim and argue that older faculty members can be productive. I do not take a position on this issue. However, these costs can also be been seen as the costs of restricting the market forces that affect the compensation paid to university professors.

Last year UBC's dean of arts Allan Tully, headed for Texas after a 27-year career at UBC. In an e-mail to faculty and staff, Tully said he had accepted an offer of history chair at the University of Texas for “personal and professional'' reasons and because of “structural constraints'' at UBC. “I don't want to retire,'' said the 58-year-old historian. One of the reasons he wanted to continue working was to help support his daughter's music studies at a prestigious U.S. music school. I predict that he won't be the last middle-aged professor to head south and that Canadian universities will have great difficulty retaining high level faculty members who are over age 45 or 50.

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