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.
Nor did the growing number of retirees boost Lucent’s health care burden. The
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.
Lucent couldn’t unilaterally reduce benefits for the union retirees, because their benefits were protected by negotiated contracts. The retired managers and salaried employees were another matter, however. This dynamic is endemic: Companies go after salaried retirees’ benefits first, since they have fewer legal protections. Among those who suddenly had their benefits cut were managers who had been induced to retire two years before, with the promise of subsidized health coverage. Lucent told them this was a shame but pointed out that the fine print gave the company the right to change their coverage. Most companies have these “reservation of rights” clauses in their benefits documents, so even if the retirees had been promised the benefits—orally, by the human resources managers, or in writing—the plan documents would override them. Lawsuits were futile. The odds of winning this type of benefits case are about on a par with the Chicago Cubs winning the World Series. The cases are heard in federal court. Retirees rarely bring them and rarely prevail. And even when cases make it to court, they take years to resolve.
Joseph Parano, a retired engineer and manager for the Bell System with Stage IV colon cancer, knew he didn’t have time to make a federal case out of it. So he tried something creative. Shortly after Schacht’s road show, Parano went to superior court in San Mateo, California, paid his $30 filing fee, and sued Lucent in small claims court. Normally the battleground for neighborhood spats and debt collectors, small claims courts are not a venue for federal benefits cases. But Parano had successfully sued both a moving company that lost his sister’s belongings and a bank for not paying interest on a dead relative’s passbook savings account, so he thought it was worth a shot. In his complaint, Parano sought $5,000 (the maximum amount recoverable under a small claims action) “for loss of spousal death benefits” and also had a claim for $2,300 in medical bills he said should have been paid from Lucent’s retiree health plan.
Lucent’s big-league lawyers were flummoxed, and in February 2004 they settled the claim for an undisclosed amount. “But it was a lot more than $10,000,” Parano said afterward, with a certain amount of satisfaction. He also got his digs in one last time, in his self-published obituary, which ran in the
He retired from AT&T after 32 years of service with a secure benefit package. After retirement he was reassigned against his wishes to Lucent Tech. Inc. who reduced his health benefits and eliminated his spousal death policy that was promised. He is survived by his loving wife of 24 years, Susie Cronin Parano.
The notice provided the time of the funeral mass and said that in lieu of flowers, donations could be made in Joe’s name to: PETA, 501 Front St., Norfolk VA 23510. Joe was sixty-nine.
OLD WIVES’ TALES
Most retirees and their spouses, however, didn’t have a chance. Connie Sharpe, a widow in Las Cruces, New
