Lucent facing benefits dilemma
Firm argues it can't afford retirees and their dependents

By Jeff Smith, Rocky Mountain News
December 28, 2004

Lucent Technologies has eliminated health care subsidies for thousands of dependents of management retirees who left the company after 1990.

The New Jersey-based telecommunications company and its unions also recently agreed to some health premium cost-sharing among union employees and retirees, as well as increases in medical co-payments and deductibles.

Those changes come on top of other benefit cuts in recent years, including dental coverage for management retirees. Lucent also erased the death benefit for management retirees, a payment made to a beneficiary when the policyholder dies.

Lucent, which has 400 employees and 3,000 retirees in Colorado — and once had 7,640 employees here before spinning off Avaya Inc. in the fall of 2000 — is an example of what's occurring throughout the country as corporate America grapples with increasing health care costs.

The company is in more of a quandary than many because of the tens of thousands of retirees it inherited from its predecessor companies that predate and follow the breakup of AT&T in 1984.

In fact, the company has roughly 10 times the number of retirees and dependents as U.S. employees — including retirees who worked for AT&T, Western Electric and other parts of the Bell system.

Retirees argue their members earned the benefits and the cuts break a social contract long established in the telephone industry between company and employee.

"Earned benefits suddenly have become subsidies," said Ken Raschke, president of the Lucent Retirees Organization.

But Lucent says the changes are for survival's sake.

"Lucent, its market and the economy have changed dramatically," said Lucent spokeswoman Mary Ward. "That's forced us to make very difficult, but necessary, decisions to remain a competitive player in the industry."

Bruce Jennings, a senior research scholar on health policy at The Hastings Center, an independent, nonpartisan research institute in New York, said companies and their retirees are caught in the middle of a perfect storm of rising health care costs and insurance premiums, and high use of health care by the elderly.

"I'm not sure you can identify a clear-cut villain," he said.

But Jennings noted that corporations exist and have made money for their investors because of the talent and hard work of their employees.

"Frankly, if a corporation is going to do that (cut retiree benefits), they have to make a very compelling case of financial necessity to lay the ethical groundwork," Jennings said, without speaking about the Lucent situation specifically.

If they pay their executives high salaries and make huge profits while cutting benefits, "one can only come to the conclusion that they're denying the contribution of the people made to them in the past," Jennings said.
"Basically, they're saying ‘you're no longer useful to us.'"

He said the most disturbing thing to people is when the "rug is pulled out from under them in the middle of the game."

Cuts need to be phased in gradually over a long period of time, Jennings said, and, "It's better not to do it for those already retired, but to get current employees looking ahead. They still have the flexibility to make various (financial) decisions."

Jennings said such cuts "clearly lead to a condition of hardship where elderly retirees are going to have to face tragic or very difficult choices"
in terms of their household expenses.

"We have to ask the question as a society, whether we feel that people after a lifetime of work and productivity should have to make choices between basic necessities of this kind."

Lucent argues it does have a compelling case.

The company's retirees — around 225,000 including dependents — generate $800 million in health care costs a year, Ward said, or nearly 10 percent of the company's annual revenue.

"So the challenge is finding a way to continue offering access to this important benefit but in a way that is affordable to the company," Ward said. "We're still subsidizing the retirees' health care; we're just no longer going to be subsidizing the health care for their dependents."

Recent retirees, though, feel they weren't given ample warning.

Many took company buyouts just a few years ago, feeling secure and calculating they could get by without working again.
They're finding they can't.

Many Lucent retirees also lost a lot of money when Lucent stock plunged from
$84 a share in December 1999 to as low as 55 cents a share in October 2002.
The stock now is trading at about $3.50 a share.

Executive compensation has been one of the sore points among retirees.

They point to reports last spring by Forbes magazine that Chief Executive Patricia Russo's compensation exceeded $40 million in her first two years, while the company lost $10 billion in market value.

Forbes ranked Russo 190th in pay for 2004, while Lucent ranked 695th in revenues and 1,816th in profits of 2,000 companies surveyed.

In a recent letter and fact sheet to management retirees, Lucent defended its executive compensation as being comparable to competitors, and said company success, rather than executive pay cuts, is the key to retaining as much of the health care subsidy to retirees as possible.

"During the AT&T years, and even eight years ago when Lucent was formed, no one could have predicted that health care costs would increase so dramatically, or that our market would decline so significantly," Russo wrote in the letter.

"Finally, some have expressed a feeling that management doesn't care, isn't sympathetic and doesn't understand the hardship created," she said. "This is just not true. We spent a lot of time evaluating numerous options before concluding we had no alternative but to find ways to reduce the costs to the company to an affordable level."

Edward Beltram, the communications director for the Lucent Retirees Organization, said the group believes the mailing was a "deceptive attempt"
to neutralize the retirees group's efforts to protect pensions and prevent a further erosion of health care benefits.

While retirees are unhappy about the cuts, all the parties agree that something needs to be done at the national level to address the problem of rising health care costs.

Raschke said the retirees are working with other groups on legislation.
Union officials also are crying out for reform.
"Health care costs in this country can no longer be resolved through collective bargaining," Ralph Maly, vice president of communications and technologies for the Communications Workers of America, said shortly after the November tentative settlement with Lucent.

"It's become a Band-Aid approach. There must be a national solution to the health care crisis because we simply cannot continue to shift these escalating costs to workers."