Buyout Package Bingo: A Reason to Choose More Work for Same Pay?

An example of irrationality? A colleague at another university was offered a buy-out package: a full year’s pay if he would resign/retire at the end of the current semester. At the same time, his school also offered a phased retirement deal: two years at half-pay, with half a usual teaching load.

This economist chose to take the phased retirement, thus choosing the same pay, but teaching four courses over two years instead of no teaching. I think he’s crazy; but I think you can write down a utility function that is consistent with his behavior and violates none of our assumptions about preferences.

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  1. Steven Thacker says:

    The answer is simple. He wants to work.

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    • Mike B says:

      For older workers working does tend to keep one from not dying. Also a university setting has numerous non-monetary rewards such as free food and drink opportunities, events and activities, engaging students and staff, learning opportunities, etc.

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    • Cañada Kid says:

      Precisely that, Mike B. Obviously, to this colleague of Daniel’s, teaching at half the work load for two years, getting X amount of dollars, is worth more than being retired with X money up front. The marginal utility of teaching is greater than what the pay up front, with 0 years work, is worth.

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    • pawnman says:

      Perhaps he felt that working the two years, even at a reduced rate, would give him a better chance at lining up another job if he hadn’t intended to retire yet. The end of the semester is a fairly abrupt end to a career…it could be he has research projects or other loose ends to tie up, or he wants to shepherd his post-doc students through graduation, or at least ensure a seamless hand-off to his successor.

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  2. A says:

    maybe he just enjoys teaching and/or the prestige that comes with it, whats irrational about that?

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  3. econobiker says:

    Does the phased retirement plan allow him to maintain health insurance and allow him to keep his credentials active so he can write under the umbrella of being employed by the university, still access university research resources, get paid to lecture outside of the campus, etc? These type of factors may be the issue of his taking the phased retirement deal versus the immediate buyout.

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  4. Ian Bright says:

    Nice problem.

    From a practical point of view, there may be tax implications that mean the two payments are not equivalent in after tax terms.

    Separately, assuming the academic has long teaching experience, the marginal cost of preparing and running the courses could be very low compared with a full teaching load. Assuming the teacher gets some enjoyment from running the particular courses to be taught (perhaps he/she can choose them) the difference between the marginal cost and marginal benefit of teaching a half load may be greater than teaching either a full load or not teaching at all.

    Further, staying at home with nothing to do may have negative utility. Unemployment is known to be a major source of unhappiness.

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  5. Hoss says:

    Opportunity costs. Maybe he gets to keep teaching the two classes that he absolutely loves to teach – they could be the reason he got into teaching in the first place. You actually can get more enjoyment out of doing something that you love versus just chillin’ at the house.

    Does he maintain his benefits (health care, retirement contributions, etc.) at half-load?

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  6. flacoman91 says:

    If he takes the lump sum, he gets taxed at a higher rate, vs getting the money over a longer period of time?

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  7. Lew Ayotte says:

    How much money will he continue to get from grants over the next two years?

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  8. Cameron says:

    I think there is some utility in staying busy- it always feels better to have something to work on and accomplish; it gives a sense of purpose. (no idea how that can be qualified, however)

    The economist might also really enjoy teaching- and is taking the opportunity to slowly leave the field so as to savor the final year as much as possible.

    Additionally- he might want to take the move slowly so as to moderate the significant life change towards retirement.

    Just a few thoughts

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  9. dd says:

    If he’s working part-time, he’s assured some pay and has the option to work part-time elsewhere as well to supplement his income. If he’s out of work completely, there’s no guarantee he can find full-time work elsewhere immediately. Seems reasonable to me.

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  10. Tom R. says:

    Keeping a consistent utility function here is interesting….is there one that explains this without also predicting that he’d volunteer to work for free? I suppose if he’s expecting negative real interest rates, he’d prefer future compensation to present.

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  11. Maltheos says:

    First off if his benefits package is worth anything on a yearly basis this will result in a net receipt of more money to him( based upon a typical benefits package, the benefits are likely worth ~50% of his annual salary, so this is likely a choice between 2/3 of a years pay( as cash only is given not benefits in all likelihood) yrs pay now( taxable at a higher rate) vs 2 years at (effectively) 2/3 pay( half pay + benefits) with the cost being half time teaching. In general the more his benefits are worth to him the better the deal the extended work is. If he is in the proper age range this may also work well with the timing of the Medicare/Social Security availability.

    If he actually enjoys teaching, or finds it useful for other reasons this it full of win. Additionally there are non-financial benefits to being a member of the faculty — access to research facilities, prestige, and standing for publication. Further, if he has work that is in process, this will allow a graceful conclusion as opposed to a rush job( or leaving it incomplete)

    Additionally, if he intends to seek other employment following this, this will definitely offer him the ability to seek employment with better standing.( it is easier to change jobs, then to seek from unemployment) Even if he intends to retire after this assignment ends, the ability to gracefully transition is very valuable.

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  12. DaveyNC says:

    He gets to keep teaching and thereby keep active. In the meantime, he gets more time to seek a full time position if that is what he wants. Very important these days to stay in the work force because apparently, many organizations are explicitly not interested in hiring someone who is unemployed.

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  13. mg says:

    How many years has he been working? (One additional year could improve SS benefit slightly). How much is being contributed to retirement each year by his institution? Also, how are his health benefits affected by retirement?

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  14. Dan says:

    An equally interesting question is why does the school offer that option?

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  15. Mark D. says:

    If the phased plan contained 2 years of health insurance vs. zero for the immediate buyout, you can bet that your colleague certainly factored that into the decision – at which point the monetary value is far from equal (especially if your colleague is older and more likely to be subject to the arbitrary “pre-existing condition” clauses of most HMOs if and when moving to a new plan)

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  16. Jim says:

    I’m actually sitting in a behavioral economics class right now, and my posting during class should give you an idea of what I think about the subject. Your friend’s decision is irrational IF you assume (as my behavioral professor does) that an individual is only rational if he is maximizing his material wealth. However, I think this is a misinterpretation of the rationality assumption and I think you could pretty easily model a situation in which your friend gets intrinsic value from working. This is pretty much what Steven was saying, but if being in college has taught me anything, it is why use 8 words when you can use 100?

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  17. Rusty says:

    Retirement is boring and a full work load is too stressful. Why not have something in between?

    I would also ask what the employer gets from this arrangement. Is the part-time worker more productive since he is happier and has more free time, or is he less productive since he is less invested in the firm?

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  18. Bob says:

    Seems smart to me. By staying employed his pension conti8nues to grow, If he is 10 1/2 or older, staying employed means delaying the RMDs from university linked retirements accounts. These two factors more than make up for the reduced salary. And he stays involved. Good thinking, I’d say,

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