Work, Compensation, and Retirement Age: Lessons from the Professors

The NYT Room for Debate blog, via TaxProf Blog, has a debate among professors over the effects of tenure, a good job in both working conditions and compensation, and no mandatory retirement age. Here is how the Times sets up the debate among the professors (not specifically law professors):

If tenured professors are retiring later, with some working well into their 70’s and beyond, does that block the career paths of their brilliant young students? A recent article in The Chronicle of Higher Education examined the effects of the aging professoriat, and quoted administrators who said that turnover was crucial to hiring new professors. A TIAA-CREF faculty survey found that nearly one-third of the professors polled said that they expected to work until at least 70, compared with about a quarter of American employees generally.

This particular discussion is set up around professors, tenure, and the university. But I want to add a more general observation.

With an aging population that is both more healthy and long-lived (compared to the original participants in social security arrangements in developed world countries), there is widespread agreement that people need to work and be productive longer in their lives. Hence the arguments in Europe over retirement at 62 or 67, and somewhat similar arguments over retirement ages and benefits for public employees, among others, in the United States. But these debates tend to leave out an important dimension – what kind of work should these older workers be doing, and at what kind of compensation?

The dilemma is this, inelegantly stated. The argument for working longer says that we need the productive labor of these people. Fine. But if you look at workplaces – this debate over universities is a good example – what we see instead is a perceived need to get these workers out of the way to make way for a new generation that will be more dynamic, innovative, produce the new ideas, methods, innovations, etc., that will increase productivity and hence standards of living. Whether you think that is true of university professors or not – it is not a stretch to believe that this is a problem for the economy as a whole.

On the one hand, we demand that older people work longer. On the other hand, we want them out of the way so that new and younger people will new ideas and energy and innovations will carry productivity forward.

Which is to say, we would ideally like to have the younger generation take charge – take control – and also to compensate them for that. We also want the older generation to continue to work – but commensurate with their productivity. When we say “productivity” here, however, we mean not just in a narrow sense, but in a broader sense of productivity that includes a propensity to innovation and the creation of a shared climate of innovation that, fairly or unfairly, is adjudged to favor the young.

However, as the aged tenured professor paradigm makes clear, the people who have control also have the ability to control such issues as compensation, possess a hold-up on the advancement of younger workers, etc. Maybe these issues don’t matter in the case of, say, coal mining in which the physical demands of the job eventually make retirement genuinely desirable for anyone. But in the case of white collar workers, particularly the so-called “knowledge workers,” however, there oftentimes no physical reason why one has to retire, and if the standard is whether one does one’s job adequately, then difficult to impossible to justify replacing the older person. The older person is getting paid a salary that fits with a certain model of human capital development – experience, etc. – but not with one that prizes innovation and dynamism.

Add to that the by now well-known psychological values of continuing to work in fields that treat a person as a valued, high status member of an working community. It is not lost on people like me that people who continue to work in serious academic work late into life seem happier, often healthier, and that a lot of that has to do with being taken seriously; retirement seems, for professors at least, a way to an earlier, more unhappy death, and with less income as well. My heroes among the aged are Paul Volker and Henry Kissinger and Alan Greenspan – no, not about politics, but about the value added to life and longevity simply by being a … player.

But taken in the aggregate, that is not necessarily what the economy needs. Yes, we can tell ourselves that by continuing to teach, research, write, and draw the commensurate salary, a professor like me is performing my highest value function in the economy. But we probably don’t believe that – oddly enough, the traditional idea of the emeritus professor, with an office, some departmental support, teaching perhaps part-time for a lower salary, and yet the ability to continue to write and publish – probably that is the right balance. Let me just say, however, that finding myself between an abstract obligation to some ideal institution and an obligation to my family, in an increasingly uncertain future world, in which my retirement accounts, health insurance, and needs of my family in an uncertain future economy are at stake – well, without any question, I will work as long as I can for as high a salary as I can command.  I think I owe my family that. That’s so, even if the notionally right thing would be for me to become some kind of emeritus instead.

Part of the silliness, seen at the abstract social level with regards to the academy, of course, is that what I regard as intellectual production of something that I would like to think has at least some temporary value … does not actually serve that function with the cycle of cultural production in the university, or at least not very much or to the extent I should like to believe. Instead, that production has little to no value for its own sake – it merely serves some kind of sorting function.   It’s a little bit like what Greg Mankiw once wrote about why economics students should take math – not necessarily because the advanced math is necessary for the work actually to be done, but because it serves a sorting function for smartness as its own thing.  Since, in the case of a middle-aged professor like me, the sorting has already taken place, the intellectual production presumably has considerably less value. I like to think that what I write is, well, intrinsically important, at least for a certain point in time in a certain social, economic, and intellectual debate – but I have my moments of Deep Doubt.

If working longer, in other words, actually means exercising an option to retain a control premium in salary terms, at the cost of innovation that might otherwise have occurred, this raises questions about whether simply saying “work longer” makes sense. Possibly what we mean is, get fired from your current job and salary, and then take a lower paying job.   That’s a problem insofar as it means taking a highly skilled professional person and then sending them to work as a greeter at WalMart; but we should not ignore the institutional circumstances in which the highly skilled person is paid well in excess of what they produce, but possesses the equivalent of a semi-property right in their position, so that their compensation reflects the hold-up not the current productivity.

But we know, too, where this leads, to judge by professors: we raise the retirement age, but because employers want younger, more dynamic, more innovative people, for rational reasons as well as irrational prejudice against older workers, we will take steps to protect people’s jobs and incomes more than we do now. That operates like a tax on new job creation and depresses incentives to create new jobs; it contributes further to a Western European like job market that prizes job preservation at high wages and benefits and low productivity at the expense of others (cf. the job market in Spain). It reinforces the status quo in terms of organizational behavior.

There isn’t any utopian answer here; there are tradeoffs, and no easy path to a job market that properly assesses the value of the experiential productivity of older workers against the dynamic productivity of younger ones. It is a problem, note, of institutions rather than markets as such; it is easier to measure the productive attraction of, say, a lawyer in solo practice or consultant (meaning, someone directly exposed to the market) than someone who is an employee, such as a professor; the market will put an ascertainable value on the former but not easily on the latter. But at one extreme of those tradeoffs, we might ask whether there aren’t some people whom it would be better to retire at lower costs, and never re-employ, in order to get them out of their positions of compensation reflecting control premiums and hold-up value within organizations. And other people who ideally would be pushed to retire as late as possible, because of the nature of their skills. My overall point is simply that to say that everyone needs to work longer is true in the aggregate as a matter of overall retirement ages – but masks huge structural tradeoffs for long-run productivity in the economy.

There is much more to say about all this, obviously. One is the question of the demographic composition of the current unemployment – apart from the immediate recession and the administration’s policies that might arguably be deterring job creation, are there elements of this recession which reflect the aging of the baby boomers even more than we have already discussed? For example, when Reagan announced morning in America, arguably it was in an important sense – the baby boom was just hitting its prime time, educated and young and brash and, not unimportantly, still at points in their lives when they could take risks and did. Is that the case now?

Hypo: The voters of the United States, say, get rid of the current administration and propose a return – just postulate for this exercise – Reaganite commitments to growth. And to our considerable surprise, we discover that although (by assumption) it indeed would have been the recipe for unleashing the animal spirits of risk taking, innovation and growth … there weren’t any animals with spirits to be unleashed.  Our aging population that, when younger, might actually have take advantage of that ‘unleashing’ (and did, back in the 1980s), today is older, far more risk-averse, and committed instead to carefully husbanding its declining resources, extracting rents from the next generation to see itself safely off to the next world, and generally engaged not in exercises in long-run growth but instead in … eating society’s seed corn.

I don’t mean to express any truly definitive views here in this post, please be clear – I don’t know what I think of all these things, but I do think there are demographic aspects of the current mess we are in that probably have an effect on policy in ways that are not easily captured by static models. How much of the “new normal,” for example, is not just the overhang of debt, but the overhang of debt on a population of aging baby boomers and their diminished offspring?

What is the effect of economic policies designed to unleash the ‘animal spirits’ when the animals are all too old and sclerotic to have any spirits, animal or otherwise? Mind, I personally don’t think we’re there yet – unlike Japan or parts of Western Europe, we still have enough young, young we as a society are still moderately interested and invested in, to go for growth. (And, yes, my view is that the economic policies that would unleash such spirits are the Reaganite ones; your views of course might differ. But the differences in substantive policies that would produce or not produce growth are not really the issue in this particular discussion, important as it is.) But we are, in my estimation, running out of time.

Update:  Let me agree with Byomtov and suggest that comments focus not on policy recipes for growth but the larger questions of younger and older and productivity.  The reason I introduced “Reaganite” policies is actually that my hypo cuts against my own policy preference – that is, I favor such policies as growth policies, but in my hypo suggested that people like me could be in for an unpleasant surprise, insofar as unleashing animal spirits – even assuming that policy is the right one for that – meets with a lack of animals to spirit, so to speak.  So please, let’s not debate here the policies one thinks lead or do not lead to growth; save that for a post directly on that point.