Mexico, had been a classic corporate spouse, moving many times as her husband, George, set up missile programs in Cape Canaveral, Florida, Vandenberg Air Force Base in California, and White Sands, New Mexico.
When George retired in 1975 after working for Bell Laboratories for thirty-four years, he had a pension, retiree health coverage, and a death benefit. The couple hadn’t taken out life insurance, because they were relying on the death benefit of $34,080, which was what George had been earning when he retired.
But when George died in 2003, his wife’s health coverage ended six months later, and his pension ended, too. Lucent maintained that Connie Sharpe had waived her right to a survivor’s pension; she didn’t remember doing so and asked to see the paperwork. Lucent told her she would have to subpoena the records. With just $950 a month in Social Security, hiring a lawyer was out of the question. “If I don’t live too long,” she said, “I won’t have to go on welfare. I sure do feel sorry for the big executives who make millions when they retire.”
Margaret Jelly, Bill Jelly’s wife, also found herself in a fix she never expected to be in. She had been a classic stay-at-home spouse in the golden age of benefits. If anyone was likely to have a secure retirement, it was this postwar cohort, whose paths followed a common trajectory.
Bill had begun working as an electrician’s apprentice for Western Electric when he was seventeen. After serving in the Air Force in Italy during the Second World War, he returned to New Jersey, and to Western Electric, as a full-fledged electrician. There were millions like him: ex-servicemen and others, swelling the postwar workforce. Companies were growing rapidly and competing for workers. In lieu of higher salaries, employers offered deferred compensation in the form of pensions and health care in retirement. This mutually beneficial arrangement enabled companies to have more cash to plow into growth and ensured that workers would have a stream of income in their old age. The young electrician met Margaret in 1949, and in 1954, when the first of their three children was born, Bill was still making only $64 a week, but he was also building up retirement benefits.
When Bill got Lucent’s letter in early 2003, he knew that if he didn’t die before February 3—a mere three weeks later—that death benefit would vanish. He figured the odds were good that he’d beat Lucent to the punch. “I have a deadline,” he told his wife when he went back into the hospital on January 14 for what they both knew would be the last time. He didn’t make his deadline. Bill celebrated his eightieth birthday in the hospital on February 14, 2003, which was also his fiftieth Valentine’s Day with Margaret. The nurses had a small party for him. He died on February 24, 2003. Lucent saved $39,000.
SLIDE SHOW
In its January 2003 letter to retirees, Lucent said it felt terrible about the move. “Eliminating the death benefit was one of the very difficult decisions we had to make over the past few years,” it told retirees. But the more than $464 million savings were crucial for the company’s survival, it claimed.
Lucent’s letter to the retirees didn’t mention that the savings it would get by killing a benefit earned by 100,000 retirees over three decades would help it pay a new retiree obligation—one that was only a little more than five years old: the special supplemental pensions and retirement benefits for its executives. In a few short years, the obligation had grown to $422 million.
Lucent enjoyed another perverse benefit from cutting retiree benefits: Even though it had never spent a cent for its retirees’ benefits, cutting them generated instant profit. The cuts announced in 2003 reduced Lucent’s liability for its “postretirement benefit plans” by $1.1 billion—a 13.5 percent reduction that year. This generated more than $1 billion in accounting gains, which the company added to income in subsequent quarters.
Lucent used $280 million in such gains in its 2003 income calculations; these gains enabled the company to report its first profits in three years. Lucent executives achieved their performance goals and were awarded handsomely. In 2004, chief executive Patricia Russo was awarded a $1.95 million bonus on top of her $1.2 million salary, $4.6 million in restricted stock, plus $4.8 million in options. Though Russo had been at the helm of the company for only two years, she had already received compensation worth $44 million.
While Schacht was lobbying the retirees, Lucent was lobbying Congress, which was about to enact the Medicare Prescription Drug Plan, which would provide government-paid drug benefits to retirees. Lucent and other companies said that unless the government gave them a subsidy to continue providing prescription drug coverage, they would likely cancel their plans altogether, which would put more of a strain on the government budget. This was largely a bluff, given that the companies had already been cutting health coverage for salaried retirees and would have loved to do the same for its union retirees, if they hadn’t had those pesky collectively bargained contracts.
Lucent, in fact, had never paid a cent for its retirees’ prescription drugs: It had used money from the trusts it acquired in the spin-offs or had tapped the pension plan to pay for them. Nonetheless, with the passage of the Medicare drug plan, Lucent received a tax-free subsidy that enabled it to whack $500 million off its liabilities. Another way to look at it: Lucent killed the death benefit to be able to hang on to $400 million in the pension plan, even as it won a subsidy of $500 million.
One retiree who didn’t buy Schacht’s plea of poverty was Walt Ehmer. He had been the chief executive of Lucent Technologies Denmark, and he scoffed at the notion that the company needed to throw the retirees overboard to survive. For one thing, he pointed out, the company was sitting on $4.3 billion in cash. Couldn’t it use some of that to pay for retiree benefits? Not possible, Schacht said. Lucent needed to commit its cash to “securing its future.”
It also needed it to pay the executives who helped engineer the retiree cuts. The year of the Schacht road show, Lucent’s cash payments to its top five executives totaled $12.5 million. That was roughly the amount of benefits paid for health care for 3,396 retirees and their dependents that year.
The following year—for the very first time—Lucent actually had to shell out something for the benefits of its 129,000 retirees: It paid $159 million. To put this figure in perspective, it also paid $300 million in executive bonuses. Schacht later defended the bonuses, saying it was necessary to pay competitive compensation to executives, “because that’s what it’s going to take to continue to attract and retain the talent required to build this company back to where we want to go.”
The spin job didn’t stop. In a financial filing discussing its pending merger with French telecom giant Alcatel SA in 2005, Lucent referred to its “costly” retiree plans and said that the combined company might have to take steps to reduce those costs.
It didn’t mention that the pension plan, which by then covered 230,000 retirees and employees, was again so flush that it pumped $973 million of noncash income into Lucent’s earnings in fiscal 2005—about 82 percent of the company’s pretax profit for the year. The only U.S. pension creating a drag on earnings was the supplemental pension for its 2,500 executives—its liability had grown to $422 million.
In 2005, Russo was awarded $3.6 million on top of her base salary of $1.2 million, and was granted an additional $8.7 million in restricted stock and options, a total of $13.5 million in 2005, a year the company would have been unprofitable were it not for the gains from its pension.
Lucent continued to benefit from the retiree plans. It used another $2 billion in pension assets to pay for retiree health care, and when it merged with Alcatel in 2006 to become Alcatel-Lucent, it still had a dowry of $5 billion in surplus pension assets.
The new French owners of the portfolio of American retirees continued to benefit from their investment: Alcatel-Lucent continued to pick away at the benefits. Thanks to gains from benefits cuts, plus pension income, the pension plan generated $1.7 billion in income in 2007, without which the company would have reported a loss of $1 billion. Alcatel-Lucent executives achieved their performance targets and were awarded their bonuses.
In 2008, Lucent eliminated its prescription drug plan for salaried retirees altogether, which generated $358 million in income. Russo stepped down at the end of the year, taking with her $8 million in severance.
In October 2009, the company froze the pensions of its 11,500 management employees. Their loss was Alcatel-Lucent’s gain: a $531 million boost to profits.
Chapter 6
