…Is the university tenure system compatible with eliminating mandatory retirement?
Yes. Unproductive old people are not, in academia, a huge problem. Most of the research value comes from a small percentage of creators in the first place, and many of those people have done their important work by age 45 in any case. To put it bluntly, the tenure system works because for many people their "output" doesn’t matter in the first place; tenure is however wonderful for the stars. The goods produced in academia are often symbolic goods anyway, such as prestige.
And what is the market trend? Private universities strengthening the real value of tenure by raising salaries and lowering teaching loads. That’s what the market test says. Superstars are becoming more productive, in part because of the Internet and the greater ease of disseminating quality work. For-profit universities, which typically don’t have tenure, have failed to take over the sector, once again showing there is usually competition between different organizational forms.
#19 in a series of 50.
Addendum: Here are Mankiw and Levitt on tenure.