Jeffrey M. Lacker

English

Research Papers in Economics

No Guarantees
P
rofessors in this country
have long enjoyed certain
features of campus life:
leafy strolls through the college
grounds, a spirit of community
and open debate, and, of course,
tenure. But lately even the job
security traditionally associated
with faculty membership is
being reconsidered. Tenure, 
like so many other benefits
American workers used to
expect, is no longer a given part
of the employee-employer pact.
In this issue of Region Focus, we examine the labor 
market in higher education. Universities increasingly are
hiring faculty members on a part-time or adjunct basis.
Tenure-track jobs are in shorter supply. At first glance, it
might appear that cost-conscious university administrations
are driving this trend. But another narrative is that there is a
new breed of faculty candidates who don’t consider tenure
particularly important. They might favor work on a contract
basis. While tenure has its appeal, some candidates are more
than willing to trade it for job mobility and the flexibility
that comes with it.
What’s clear is that the amount of time people typically
spend in one position or with one organization is becoming
shorter across all sectors of the U.S. economy, not just in
higher education. This trend has important implications for
the broader labor market — for example, the fact that 
general skills have grown more important than job-specific
skills. It is likely no coincidence that in this more dynamic
labor market, the role of retirement benefits is evolving 
as well.
Retirement benefits still make up a large share of how
much employers spend on their workers’ total benefit pack-
ages, just not as large as in the past. In 1960, pension and
other benefits accounted for almost 60 percent of total
benefit spending, compared with closer to 46 percent today.
The new wrinkle is in how benefits are structured. Health
benefits, for example, require greater attention from
employees in terms of selecting insurance coverage.
But nowhere is the shift to employee-accountable 
benefits more evident than in the retirement realm. 
There has been a nearly wholesale move away from so-called
“defined benefit” pension plans to “defined contribution”
plans. Defined benefit pensions guarantee a post-retirement
income stream for life, with little or no oversight by 
employees. Defined contribution plans, usually in the form
of 401(k)s, oblige workers to make choices affecting 
their financial futures, with employees bearing all of the
investment risk.
PRESIDENT’SMESSAGE
Summer 2007 • Region Focus 1
Consider these figures: More than half of all full-time
employees have some sort of pension coverage, a percentage
that has declined a little over time but not much. During the
same period, pensions of the defined benefit variety 
have dropped from 69 percent to less than 40 percent
among full-time employees with pensions. Today, 80 percent
of all full-time employees covered by pensions have defined
contribution plans.
One of the leading reasons why this trend is taking place
has to do with the changes I have described in the 
U.S. workplace. The ultimate value of a defined benefit
pension depends on a combination of the worker’s length 
of employment and highest wage. As a result, these 
traditional pension plans reward employees who stay with
their employers.
The decline in defined benefit plans has coincided with
the decline in job tenure. For men, expected job tenure fell
18 percent between 1983 and 2001. While employers 
have moved away from defined benefit pensions in part
because of their high costs, they also have done so because
employees no longer value them as highly. In today’s 
dynamic labor market, employees increasingly prefer
portable retirement plans.
It looks as if 401(k) plans will be not only the retirement
plan of the present, but also of the future. Of course, these
plans carry the risk that employees’ retirement years won’t
be adequately funded. Indeed, many studies have shown
that some workers aren’t setting aside enough in their 401(k)
plans, and often falling short of maximizing the impact 
of their employer matches. About one in five eligible
employees fails even to sign up for their firms’ 401(k) plans.
Those who do are responsible for making investment choices
in their portfolios, a chore that previously was handled by
professional managers. Fewer employers now bear the
investment risk associated with their employees’ pensions.
While these changes can be viewed positively since they
give workers greater control over their retirement options
and greater flexibility to change jobs, they require an
increased level of financial awareness. Innovations like auto-
matic enrollment in 401(k) plans are helping. But with life
expectancies rising and the well-publicized troubles facing
Social Security, the future well-being of our citizens depends
more than ever on their financial savvy.
JEFFREY M. LACKER
PRESIDENT
FEDERAL RESERVE BANK OF RICHMOND
REGION FOCUS REWORK SUMMER ISSUE  9/20/07  4:17 PM  Page 1

President's message : No guarantees

http://www.richmondfed.org/publications/research/region_focus/2007/summer/pdf/presidents_message.pdf

President's message : No guarantees

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Research Papers in Economics