Retirement Heist

ONE OF THE LAST LETTERS Bill Jelly received before he died in 2003 was from his benefits administrator, informing him that the death benefit from his employer, Western Electric, was going to be canceled—in one month. He’d earned the benefit decades ago, when death benefits, like retiree health coverage, were commonly offered to people who’d spent most or all of their careers at a particular company.

The benefit wasn’t much: $39,000, the equivalent of the salary he had the year he retired in 1979. But he had been counting on it to pay his burial costs and the medical expenses the couple faced, thanks to cuts to their retiree health coverage. “I guess I’m going to have to die before then,” Jelly, who was seventy-nine, told Margaret, his wife of fifty years.

But even though Jelly had spent his entire career at Western Electric, the letter had come from Lucent Technologies, based in Murray Hill, New Jersey. At that point, Jelly had barely heard of Lucent, a spin-off created seventeen years after he had retired. But like millions of retirees across the country, his pension and retirement benefits were under new management thanks to mergers and restructurings that took place after he retired, thereby shuffling his benefits to a new company. From a management point of view, pools of retirees are essentially portfolios of debts and assets. The debts are the pensions and retiree health benefits the workers earned, and the assets are the funds set aside to pay them. When a business unit is sold, merged, acquired, or spun off, a portfolio of retirees is often packaged along with the rest of the business.

To the new owners, the retirees in the portfolio aren’t former engineers, managers, or factory workers. They’re a resource to be managed with an eye toward profits. Retirees find it unsettling that their pensions have migrated to new owners, especially when the new portfolio owners send them “Dear Retiree” letters, telling them that their health coverage is ending, their pension has been incorrectly calculated, or other benefits are being cut. When the retirees’ increasingly frantic appeals fall on deaf ears, they conclude that the new company has no loyalty to them. But they don’t realize the half of it. They’ve literally become human resources, to be consumed for cash and profits.

PENSION ASSETS

Chuck Ackerman discovered this with a shock in early 2000. The first sign of trouble was when his pension check didn’t arrive on time. At first he thought it was a Y2K glitch. Then he received a letter from Raytheon, a company where he had never worked, telling him that not only was he not going to get his pension check but that he actually owed the company $31,904 that he’d been mistakenly paid over the prior five years. The letter explained that the company would be withholding his pension payments for the next year and a half until the “debt” was paid off. It was like a punch in the gut for the retired pilot, who was already battling cancer.

Ackerman had flown corporate jets for Hughes Aircraft for twenty-six years, delivering executives, including C. Michael Armstrong, then the chairman of Hughes Electronics, to meetings around the globe, ski vacations, and private homes in places like Baja and Taos. He loved being a pilot, but regulations required that he retire at age sixty, in 1992. He plowed his retirement savings into an eighteen-acre farm outside of Santa Maria, California, where he and his wife, Audrey, cleared land and grew grapes to sell to local wineries.

Five years after he retired, in 1997, defense giant Raytheon acquired Hughes. The acquisition brought with it a portfolio of thousands of retirees, along with pension and health care liabilities of $5.6 billion, and $6.4 billion in assets to pay the retirees’ benefits. In other words, as part of the acquisition, Raytheon got a pool of assets that was more than large enough to pay every cent of the retirees’ pension and healthcare benefits until they died. Hughes, in effect, sold roughly $1 billion in pension surpluses to Raytheon. This boosted the price Raytheon paid for Hughes, but the acquisition had an immediate payoff: The infusion of billions of dollars of pension assets into Raytheon’s pension plan generated roughly $500 million of income in the first year.

Despite having acquired $1.2 billion more than needed to pay the retirees’ pensions, Raytheon did what other companies typically do when they acquire a portfolio of assets: It set about trying to maximize its investment. Under pension law, a company can’t cut pensions once retirees start receiving them. But if it determines that the retirees are mistakenly receiving benefits that are too large, it can claw the overpayments back.

One of the first things companies do is assign their benefits consultants to flyspeck the records and ferret out mistakes in the company’s favor. Given the complexities of pensions, it’s no surprise that they find some. It might be that an incorrect interest rate was used, or that twenty years earlier, a prior owner of the portfolio miscalculated a cost-of-living increase. Raytheon hired Hewitt Associates for this task. On its Web site at the time, Hewitt boasted that one of its audits had “uncovered $4.1 million in savings per year by eliminating participants erroneously left on the carrier’s system.”

Hewitt concluded that Ackerman’s pension had been incorrectly calculated. Pilots are required to retire by age sixty, so many receive a pension supplement until they reach age sixty-five. The pension administrator had forgotten to end the supplement when Ackerman turned sixty-five. Now Raytheon wanted its money back.

Pension law requires that pension overpayments be returned to the pension plan, but it doesn’t say who should return the money: the employer that made the mistake, the current portfolio owner, or the retiree. Companies usually pursue repayment from the retirees or their surviving spouses, by reducing the person’s pension or even stopping it altogether until the overpayment is recovered. Private employers like Hughes are allowed to offset 100 percent of a retiree’s pension to recoup an overpayment. Multiemployer pension plans, which cover retirees at different companies, are limited to 25 percent, while the Pension Benefit Guaranty Corp., which takes over failed plans, can reduce a pension by no more than 10 percent, and doesn’t charge interest.

Ackerman made increasingly frantic calls to the toll-free number of the pension administrator, arguing with the clerk, who didn’t know how pensions work, let alone the kind of pilot’s pension Ackerman had. Ackerman couldn’t prove he hadn’t been overpaid—he was a pilot, not an actuary. He scrambled to find the details in pension stubs going back years, documents he’d received, or forms he’d signed. He couldn’t figure out how the pension was calculated. “When your pension gets shifted from one company to another,” his wife, Audrey, concluded, “they’ve got you over a barrel.”

Seniors’ advocates say it’s unfair for retirees struggling with small pensions on fixed incomes to pay for a company’s mistakes. “Our clients are often confused and shocked to learn that their pension plan overpaid them,” says Justin Freeborn, a legal-aid lawyer with the Western States Pension Assistance Project in Sacramento, California, funded in part by the U.S. Administration on Aging. He has seen a steady stream of frightened retirees in recent years coming for help when they receive demanding letters from the pension administrators. “In most cases, they had no idea they were receiving the wrong amount. They’ve already spent the overpaid money, and they have no way to pay it back.”

Chuck Ackerman didn’t have the money or the time to fight in court: Just four days before he got the letter from the pension administrator, he learned that the esophageal cancer he’d been treated for had spread to his liver and lungs. Figuring his days were numbered, he appealed to the company to forgive the debt. While awaiting an answer, he began chemotherapy treatments at a hospital near Santa Barbara, where he ran into a retired vice president of Hughes and told him about his pension problem. A few weeks later, when he checked his mailbox, he found a note from the retired executive, with a personal check for $5,000. He also found a letter from the retirement board of Raytheon, denying his appeal to review their decision to dock his pension.

Raytheon refused to forgive the debt and demanded that the Ackermans repay it within a year. The couple appealed this decision, because it would have consumed all of their pension plus most of their Social Security, leaving them with nothing to live on. Raytheon relented, and later that year agreed to let them repay $500 a month. Between chemotherapy treatments and battles with the pension administrator, Ackerman poured himself into farmwork. Even as his six-foot-four-inch frame dwindled to 140 pounds, he also made various improvements on the farm—fixing the roof, mending outbuildings. What bothered him the most, Audrey recalled, was that after he’d spent so many years as a pilot making sure the Hughes executives were safe, “he felt like the company considered him a liar and a cheat.”

Ackerman died in 2002, and it took his wife two and a half years more to repay the debt to Raytheon, out of her diminished widow’s pension. Then, for three months, even after she’d finished paying the debt, Raytheon mistakenly continued to withhold the $500 monthly repayments. Only after she complained a number of times did Raytheon correct the mistake.

BLINDSIDED

A portfolio of retirees can change hands so many times that even the new owner of the retiree portfolio can’t keep track of who’s owed what. In the late 1990s, British Petroleum, or BP, as it is now called, acquired a portfolio of retirees from a variety of companies when it merged with Amoco. In 2000, it hired a new pension administrator, Fidelity Investments Institutional Operations Co., which handles benefits plans covering about nineteen million employees and retirees. The BP plan, thanks to its promiscuous rounds of acquisitions and mergers, had close to fifty thousand U.S. retirees, plus seventy thousand workers and former employees who’ll get pensions someday. Fidelity audited the plan in 2004 and concluded that 316 retirees had mistakenly been paid a total of $100 million that some other predecessor company owed. BP began the process of recouping the money.

One of the retirees was Charlie Craven, a retired mine supervisor in Tucson. Craven had been receiving a pension of $346 a month for eighteen years, until January 2005, when, instead of a pension check, he received a letter from Fidelity informing him that a recent audit revealed he was receiving benefits in error.

“You must repay the overpayment of $18,363 in one lump sum by January 21, 2005. If you are unable to make a one time lump sum repayment and wish to set up a repayment plan, your payments are as follows: $1,530 per month for (12) months.” The letter added: “If you do not comply within the stated timeframe, the plan sponsor may take additional steps to correct this overpayment…. Such steps might be to reclassify the [overpayment] as miscellaneous income,” issue a corrected 1099-R, and report him to the Internal Revenue Service, “or take more formal collection action against you.”

“I thought when you retired, that was it,” Craven said. “How can they come to me all these years later and tell me this?” Craven, a widower with macular degeneration who is nearly blind, had a friend read him the letter, which said that a company called Foundation Coal Corp. should have been paying Craven’s pension, and directed him to write to Foundation Coal, in Linthicum Heights, Maryland, for information about his benefit. In the meantime, he needed to begin repaying the debt to BP. “Please accept our apologies for any inconvenience this may have caused,” the letter concluded.

Craven had never heard of Foundation Coal. He’d earned the pension working for Cyprus Mines, a copper-and-minerals company, and had bounced among several mines in Arizona and Nevada over the years. He didn’t know which company bought what; he only knew that his check had been coming from BP.

He was still thinking about this dilemma two weeks later when a second letter from Fidelity Investments arrived, reiterating the demand for repayment. This letter, like the preceding one, was delayed because it had been sent to his prior address in Kingman, Arizona. This second letter noted that Craven had originally earned his pension under the Amoco pension plan, which had merged with the BP plan, “but the liability for that benefit and the associated pension assets were subsequently transferred to Cyprus Minerals in 1985… and therefore not payable under the BP pension plan. This letter didn’t mention Foundation Coal, but directed him to write to Fidelity Investments in Cincinnati or call a toll-free number. Craven asked his friend Ruth Emley, a widow from Nevada he’d met online, to make the call. Ruth, who, like Craven, was seventy-nine at the time, called but got an automated system and was put on eternal hold. “We never got to talk to anyone there,” Ruth said.

This second letter told Craven that if he disagreed with the demand for payment, he should send a claim, “stating specific grounds upon which your request for review is based,” along with supporting documents, to BP’s claims-and-appeals coordinator in La Cañada Flintridge, California. By the time he got the second letter, Craven had been without his pension for three months.

So who should have been paying Craven’s pension? Even if Craven had been able to see, his computer was broken, and his research skills were limited. His math wasn’t so great, either: He hadn’t noticed that eighteen years of monthly payments of $346 added up to a lot more than the $18,363 Fidelity’s letter was demanding. Like many retirees, he had not followed the mergers-and-acquisitions activity of his former employer, and kept few records (or, in his case, no records, other than canceled checks). His companion, Ruth, started digging through old boxes of canceled checks and looked in the Yellow Pages under “Senior,” hoping to find someone to help.

Though Craven was a little hazy on his employment history, this is what records later showed. He first went to work at a company called Cyprus Mines in 1962 and left in 1979, the year Amoco Corp. bought the company. He returned to Cyprus two years later and retired in 1985. The year he retired, Amoco spun off Cyprus as an independent company called Cyprus Minerals, transferring to it the pension liabilities of current employees. Cyprus Minerals began paying Craven a pension for his last five years of work, $52 a month. In 1993, Cyprus Minerals Co. merged with Amax, forming Cyprus Amax Minerals Co. Phelps Dodge Corp. acquired Cyprus Amax Minerals Co. in 1999 and continued paying the small pension. Meanwhile, Craven also had begun receiving a second monthly pension for his earlier work stint, for $348. Amoco paid this, and when Amoco became part of British Petroleum in the late 1990s, the combined company paid this second pension. Got it?

By the time BP acquired the portfolio of old miners, it had already passed through so many hands that the pedigrees of many of the pensions were in question. Benefits audits rarely turn up any mistakes in the retirees’ favor. As it turned out, though, there was a mistake with Craven’s pension: Following a second review of the paperwork, prompted by a reporter’s call to BP, Fidelity concluded that BP was responsible for Craven’s pension after all. It sent him a letter saying it would resume paying his pension and he would receive his back payments, with interest. Unfortunately, most retirees don’t have reporters interested in figuring out how much pension money they’re owed.

LUCENT’S SPIN JOB

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.

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.

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 San Francisco Chronicle in February 2006:

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 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.