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

Nor did the growing number of retirees boost Lucent’s health care burden. The total amount of money Lucent spent on medical benefits didn’t change. The amounts the company paid in medical benefits were essentially transferred from the employee side of the ledger to the retiree side. In 2003, Lucent spent about $1.1 billion in health care costs, roughly the same amount as in 1999. The only difference was that the amounts it spent for employees shrank (because there were fewer of them), while the amounts it spent for retirees grew (because there were more of them). In 1999, it paid $517 million for employees and $539 million for retirees; by 2003 the company was spending about $850 million for retirees and $264 million for employees. Once retirees reach age sixty-five and are eligible for Medicare, the employer’s costs for them fall—to an average of about $1,200 a month.

The downsizing helped Lucent financially in a number of ways. For one thing, it didn’t have to pay for the health benefits of laid-off workers who weren’t eligible for retiree health benefits, a group that included any salaried employee hired after June 1986. That was a cash savings. And for salaried workers hired earlier, the company established a ceiling on what it would pay for their benefits. Adopting the cap in 1999 reduced Lucent’s retiree health liability by $359 million.

But the biggest benefit was that Lucent no longer had to pay for their health care benefits from corporate cash: It could tap the pension plan. By 2003 Lucent had taken out more than $1.2 billion in assets from the pension plan to cover health benefits.

There was a limit on how much pension money Lucent could transfer from the pension plan to pay for retiree health coverage. Companies can do this only when they have a surplus. By 2003, most of the nearly $20 billion surplus it had in 2000 had evaporated. It was consumed by Lucent to pay for severance and medical benefits, and erased by stock market losses and low interest rates. This meant that there wasn’t any more money in the piggy bank for Lucent to take out. Something would have to be done.

TAPPED OUT

Up to this point, Lucent had not spent a penny on the retirees it claimed were so burdensome. Faced with the prospect that it might actually have to spend cash on retiree benefits for the first time, Lucent had a better idea: It chose to cut them—again. Knowing that this would be an unpopular move, Lucent had to put a positive spin on the news. So it called Henry Schacht, a former CEO, out of retirement and sent him on a ten-state road show to deliver the bad news.

One of his stops, in October 2003, was at the Sheraton Hotel in Buckhead, Georgia, where Schacht made a presentation to a group of more than a hundred retirees. Security was tight, and as the retirees tottered in, some propped on walkers and canes, uniformed officers searched their handbags and briefcases, confiscating cameras and recording devices. Only after their photo identification had been checked and their hands stamped were they allowed into the chilly auditorium. No reporters were admitted.

Schacht took the podium, and in his lengthy PowerPoint presentation he explained the burden Lucent faced from spiraling health care costs and rising numbers of retirees. It was a message that has grown commonplace in the media. Lucent just could not afford to sustain the generous level of benefits it had been paying. The company had five retirees for every U.S. worker, Schacht said. “Unfortunately, the numbers just don’t work.”

The retirees were resigned: Unless the company cut benefits, it might just go bankrupt, and they’d end up with nothing. Lucent couldn’t cut the retirees’ pensions—pension law didn’t allow that—but it would be legal to cut the other benefits: health care, dental coverage, death benefits, coverage for spouses, Medicare Part B premiums, even telephone discounts. Lucent went after them all.

Even the oldest retirees were hit hard. Lucent eliminated dental coverage and Medicare Part B payments, which retirees used to pay for their Medicare premiums. For Howard O’Neil, who was ninety at the time, losing the premium coverage for himself and his wife, Mabel, cut his $970 monthly pension almost in half. (Premiums are deducted from the pension.) He’d earned the benefits working at Western Electric from 1939 until he retired forty years later. He thought this was pretty rough treatment, akin to getting a pay cut in retirement. That, in fact, was accurate: Retiree benefits are a form of deferred compensation, so cutting them is the equivalent of a retroactive pay cut.