21 November 2004
Retirees see their health benefits fade
CHICAGO -- Things finally are looking up at Lucent Technologies, the telecommunications gearmaker, where profits more than tripled in the most recent quarter.
Yet Lucent's retirees are not sharing in their company's improved fortunes. Thousands will see their health-care costs rise in January when the company's most recent round of cuts to retirees' medical benefits takes effect.
Robert Jerich, who worked for Lucent 37 years, has seen monthly premiums for him and his wife soar to $577 from $32 since he retired 3 1/2 years ago.
"Lucent has forgotten about its retirees as have many companies," said the 61-year-old Illinois resident. "People that made companies what they are today have just been dismissed."
Lucent is among a growing number of large employers that continue to curtail retiree health coverage even though the economy is improving and their bottom lines are getting fatter.
Unless the benefits are guaranteed in a labor agreement, companies generally are not obligated legally to maintain these entitlements. Faced with surging medical costs and burgeoning retiree populations, many employers are trimming their contributions to existing retirees' health coverage and eliminating coverage entirely for future retirees. Medical plans that promise a defined contribution are going away in much the same fashion as defined-benefit pensions, experts say.
Lucent, with $9 billion in 2004 sales, will spend $800 million this year on retiree health care, more than twice the $348 million in net income it reported for the quarter ended Sept. 30.
Lucent's 31,800 active employees are supporting 125,000 retirees plus tens of thousands of their spouses -- a situation not unlike that facing the nation as aging baby boomers move into their retirement years.
"We simply cannot afford to absorb U.S. retiree health-care costs at the level we had and remain competitive," said Mary Ward, a spokeswoman for the Murray Hill, N.J.-based company. "The numbers just don't work."
Yet the math is no less daunting for retirees' fixed-income households, where the hardship engendered by cuts to a once-sacred entitlement sparks a keen sense of betrayal.
"There was never a written contract, certainly not for management employees, but there was always an understanding that our health-care benefits would be provided for," Jerich said.
Retiree medical coverage, which was a coveted benefit for decades at large companies, has been eroding since the late 1980s.
Thirty-six percent of large firms offer the benefit, down from two-thirds in 1988, according to a 2004 study by the Henry J. Kaiser Family Foundation.
For retirees age 65 and older, these company-sponsored plans offer better benefits than Medicare, such as free doctors' office visits and low copayments for drugs. Medicare's drug coverage is not scheduled to start until 2006.
An estimated 12 million seniors covered by Medicare also get benefits from employers, according to human-relations consultant Hewitt Associates. An additional 3 million younger retirees between the ages of 55 and 64 rely on company benefits to bridge the gap until Medicare kicks in.
Yet the ranks of companies that continue to provide such benefits are rapidly dwindling.
Ten percent of large companies eliminated all subsidized health benefits for future retirees last year, according to a 2003 survey by Kaiser and Hewitt. More telling, 20 percent said they are "very likely" or "somewhat likely" to terminate all subsidized benefits for future retirees in the next three years.
The survey included 408 large private-sector firms with 1,000 or more employees.
"Many younger and middle-age workers will not have the same subsidized health benefits" as older workers, said Frank McArdle, who heads Hewitt's Washington research practice. "It's an important thing for employees to start factoring into their retirement plans."
The biggest changes over the next several years are likely to occur at public-sector employers, long considered safe havens for workers looking for secure retiree benefits.
Accounting-rule changes that kicked in more than a decade ago at private companies -- prompting many firms to place caps on their future retiree health-care obligations -- will affect public-sector employers starting in 2006. These changes require employers to disclose their estimated future obligations for active employees when disclosing retiree benefit costs.
"There is a sea change coming," said Christopher Bone, executive vice president and chief actuary at Aon Consulting. "There is going to be a lot more attention on the cost of that benefit, either how can I finance it or how can I trim it back."
In the private sector, many companies, including Lucent, are passing a greater share of health costs to retirees after hitting caps they adopted in the early 1990s to protect themselves from rising costs.
The trend toward cutting entitlements affects even large employers long known for offering generous benefits. Such old-line companies as Motorola and Deere & Co. no longer offer coverage for future retirees.
Lucent provides an example of the demographic and competitive pressures.
The company's retiree population swelled when thousands took buyouts as the company slashed its workforce to stay afloat during the telecom bust a few years ago. The ratio of retirees to active workers is nearly 4 to 1.
At the same time, few if any of Lucent's competitors offer retiree benefits. At its big European rivals -- France's Alcatel and Germany's Siemens -- federal taxes pick up health-care benefits.
"Lucent's market and its economy have changed dramatically over the last few years," said Ward.
That is little comfort to Jerich, who no longer gets any company subsidy for his wife's health coverage.
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