Retirement Heist: how companies plunder and profit from the nest eggs of American workers

Recovering overpayments is just nickel-and-dime stuff when it comes to managing a portfolio of retirees for cash and profits. No one has done a better job at squeezing retirees than Lucent, the AT&T spin-off. Over its short life, Lucent reaped billions of dollars in cash savings and profits from its retiree portfolio, even as the company persistently maintained—to analysts, shareholders, employees, retirees, and lawmakers—that its 130,000 retirees were crushing the company. The argument sounded plausible. Lucent had five retirees for every worker, putting it in the same club as automakers and steel companies. But whatever financial problems Lucent was having, the retirees weren’t the cause. They were merely the scapegoats.

Lucent was created in 1996 when AT&T spun off its equipment-manufacturing business, including Western Electric and Bell Laboratories, along with their more than fifty thousand retirees. These included telephone operators and linemen, middle managers, engineers who developed missile systems, transistors, lasers, and fax machines, and the factory workers who built them. Some had been retired for months; many had been retired for decades. Some had worked for the business units included in the spin-off, and others had worked in other parts of AT&T.

Loading up the retirees into a new unit and spinning it off enabled AT&T to unload a $29 billion liability for pensions, health care, dental coverage, and death benefits. But the retirees weren’t a burden to the newly formed company: The retiree portfolio also contained a $29.8 billion pension fund, and two trusts to pay retiree health benefits. All told, Lucent started out with $33.5 billion in assets, to cover a $28.7 billion obligation. In short, the company started out with almost $5 billion more than it needed to pay 100 percent of the retirees’ benefits.

Lucent, nevertheless, began trimming benefits. It cut the salaried employees’ pensions in 1998, and in 1999 it eliminated discounted longdistance phone rates for anyone who retired after 1983. The move, combined with other changes, lessened the retiree-benefits obligation on Lucent’s books by $359 million.

Pension cuts and the telecom bubble caused the assets in Lucent’s pension plan to balloon. At its peak, in 2000, it had $45.3 billion in assets—a surplus of almost $20 billion. The vast pool of pension assets boosted Lucent’s income by hundreds of millions each year, from $265 million in 1996 to $975 million in 2000. By 2003 it had added an additional $1.6 billion to income.

In its early years, Lucent focused on growth: acquiring companies, hiring people, borrowing heavily, and generally operating as if the roaring telecom market would last forever. It didn’t. When the bubble burst in 2000, demand for telecom products and services fell sharply, and Lucent began frantically downsizing. It spun off business units, made early-retirement offers, and cut staff, which the pension plan helped pay for. The company used $800 million in surplus pension assets to pay termination benefits as it cut 54,000 employees from its payroll in 2001 and 2002. It learned this move from parent AT&T, which in 1998 had provided 14,700 managers the equivalent of one half-year’s pay, in the form of a cash payout from the pension plan, as severance. At Lucent, the move consumed $4.7 billion in pension assets. By 2003 Lucent’s workforce had shrunk from 118,000, in 1999, to 22,000.

Lucent also used the retiree health plan as a downsizing tool. In 2001, Lucent offered retiree health coverage to a pool of managers who were not yet eligible for the benefit, because they had not worked fifteen years at the company and had reached age fifty-five. Ultimately, more than 23,000 accepted the offer in 2001 and 2002 and left the company. Taken together, Lucent used the pension and the retiree health plans to finance a massive downsizing without paying a cent from its own pocket.

As its workforce shrank, its retiree population grew. By 2004, Lucent had 127,000 U.S. retirees—a fact that Lucent pointed out over and over. But increasing its number of retirees didn’t boost Lucent’s pension burden. Just the opposite: When an employee turns into a retiree, his pension stops growing; as the pension is paid out, the liability declines, dollar for dollar. If the pension is properly funded, as Lucent’s was, it has adequate assets to pay all the pensions owed to current—and future—retirees. This isn’t something unique to Lucent—it applies to all companies with pensions. So it didn’t matter how many Lucent employees retired; the company still wasn’t losing any money.