At Work

Broken promises … many retirees at risk

Let’s say someone made a commitment to you, a commitment that would be important to you in the future and indeed for the rest of your life. In exchange for that promise you gave up a great deal of money (pay) and equally important, you put trust in this promise as part of your future financial security.  But then when you needed it most, the promise was broken. Think of it as purchasing a deferred annuity and when it came time to collect,  the insurer simply changed its mind and decided not to pay … so it could save money.

Once you retire from a company you are helpless; no longer an asset, you are instead a liability. Not your union nor anyone else can protect you. Tough s__t as they say.

According to Forbes, GE has become the latest large employer to pull the plug on retiree health benefits by breaking a long-term commitment to provide health benefits and replacing it with a private exchange and funded with a defined contribution. In 1988 66% of large employers (200 + employees) offered retiree health benefits. By 2015 that number was 23%. That reduction collectively represents a massive cut in retiree discretionary income (without offsetting with higher direct compensation before retirement I might add).

Traditionally, employers contributed a percentage of the premium so if the retiree paid 25%, while the dollar amount may increase, the employer still paid 75% of the total costs. With a defined contribution approach the employer contributes a fixed dollar amount and as the premium increases the retiree pays a greater and greater share of the premium with the strong possibility that over time the premium truly becomes unaffordable. To keep this in perspective, remember the employee retired under one set of rules and suddenly the rules are changed.

Spin doctors like to express such a move as giving retirees more choice and flexibility. GE explains it will save $3 billion … you can decide who the winners and losers are.

How does all this happen, what motivates employers to … well, break commitments and screw their retired employees?

You know the answer; money of course. Most likely earnings targets are in jeopardy and an easy source of cost cutting are the helpless retirees, the very people who while working were called a great asset, who the employer wanted to be engaged, who were part he team. 😏 

Some executive wants savings, a lower level executive; in this case the VP of Benefits has a brilliant idea. Let’s look at the tremendous retiree benefit liability. He or she calls in a consultant for his brilliant ideas, ideas sold to other employers over and over. But there is a new twist here. Now consulting firms are also selling private health insurance exchanges. They also promote the defined contribution approach.

The consultant gets paid for selling ideas. The consultant makes money with its health insurance exchange. The employer lowers its cost and it’s long-term liabilities and the retired employees, well they are left …

… with less money to spend and the full liability of growing health care costs … something they were led to believe they were protected from and while employed were told was part of their total compensation.

imageAll this is legal. Look in your benefits booklet and you will see disclaimers allowing the plan sponsor to do just about anything, including terminating benefits. But it’s not right or necessary.

How do I know all this? Because I managed employer health benefits for nearly fifty years. I made changes that dramatically reduced the employer’s retiree costs. The difference was when I made those changes, they only applied to workers newly employed after a future date. We didn’t change the rules after the fact. 

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9 replies »

  1. I think it’s funny how you blast the “powerful unions” for their contracts. They are just that, contracts, both sides agreed to the terms, period. Just a like a mortgage, one agrees to the terms, somehow it has become acceptable to just walk away and have the debt be forgiven. A career with the company you worked for, had a reputation that was one would never get rich, but would have a job for life. Able to earn a good living but the security was a strong point. So now in deregulation, plunging gas prices, whatever the excuse to cut benefits, they are doing so and you are crying foul. It is foul. What about the other workers who took jobs that didn’t pay as well, but had great benefits, like some government/ public works jobs?. A contract is a contract, no different than professional athletes, no matter how crazy we may think the terms are, both parties agreed to them, and should be obligated to fulfill them.
    I am one of those that was hired with a pension, accepted 3% raises thinking I would have a pension. Now retiring with a pension isn’t looking so promising, pensions might be extinct when I am eligible. Oh well end of rant.

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    • The only powerful unions I blast are public employee unions who get what they want through political connections at the expense of taxpayers. Their contracts in many cases result in total package way above that of average workers and taxpayers who must foot the bill. And then the cost of these promises is not funded by politicians who don’t want the public to know the full cost and taxes necessary to pay for them.

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      • No longer true, if your pension is part of a multiemployer plan. Certainly, not true if your plan is underfunded, terminated, taken over by the PBGC.

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  2. “All this is legal. Look in your benefits booklet and you will see disclaimers allowing the plan sponsor to do just about anything, including terminating benefits. But it’s not right or necessary.”

    “Right or necessary”? Says who? Stop the criticism of GE and other companies who delivered exactly what they promised. Their retiree medical plan document is “enabling”. It created and defines the benefit. What isn’t in the document, your “right or necessary” was never part of the plan. Looks to me like they delivered exactly what they promised … and if they did not, the lawsuits will follow.

    So, what was GE’s commitment? It was a commitment to provide retiree medical coverage, with the reservation of the right to change the coverage in the future. For 30, 40, 50 or more years, no one complained when they improved their retiree health coverage, in response to health care inflation, to incorporate the newest technology, etc. They never asked anyone for their consent before improving the coverage. Did they?

    GE apparently DELIBERATELY decided NOT to vest or guarantee the commitment. If GE wanted to guarantee or vest what you think they committed to (but expressly did not commit to), they could have done what the State of Illinois and the City of Chicago apparently did (according to the Illinois State Supreme Court), which was to preclude any change that would lower the highest ever level of coverage at the greatest cost to any current employee or retiree. GE certainly knows how that type of benefit plan works, as they do plenty of business in Europe and other countries, where that is the statutory requirement … you promise a specific level of accrual or benefit, and, for those employees, you lose the right to scale it back. If you want those kinds of commitments, go work for GE in Europe. Oh, yeah, it is probably why GE and other companies DO NOT provide such benefits in those countries – at least not to the rank and file. That is, most multinationals DO NOT offer pension plans, nor “retiree medical coverage” in excess of the state insurance program (here in the US, Medicare).

    GE could have also funded their retiree medical commitment over the past 10, 20, 30, 40, 50 or more years. Workers could have insisted upon it, so that the money would be there when they got to retirement. Obviously, everyone knew, or should have known, there was no trust fund, and no intent to ever fund the coverage. My bet is that GE made all of this totally clear to their employees and retirees.

    Only idiot politicians assert that the status quo can be maintained – by misspending taxpayer dollars to fund multiemployer trust health coverage for those whose coverage would otherwise be displaced by foreign trade or bankruptcy. Don’t you get it? All of you on this page pay everyday for GM retiree coverage, coverage that is better than your coverage (if any), and pay for GM retirees in addition to paying for your own coverage! https://www.sec.gov/Archives/edgar/data/1467858/000119312510078119/dex1012.htm This particularly irritates me because my retiree health care coverage is funded, through a 401(h) account in my pension plan. Yes, right, my employer DID commit and DID put their money into the plan.

    The fact is that, per your comment above, GE TOTALLY FULFILLED THEIR COMMITMENT. Their commitment was to provide health coverage, with the reservation that it could be changed, without consent, in the future – improved, reduced or whatever.

    For comparison, I can confirm that, the funding of my retiree medical coverage did not “vest” individuals in a particular level of coverage. That is, retirees at my firm went through similar changes in 2008. Compared to 2006, they had better coverage and lower cost after the change. And, that is still the situation today, where my retirees receive HIGHER LEVELS OF COVERAGE AT LOWER COST THAN THEY PAID TEN YEARS AGO (2006)! In just over a year, I will join them – if my former employer decides to continue offering retiree medical coverage.

    Finally, I would bet that for someone who has been retired 15 or more years, the value of the coverage they receive under the new process STILL EXCEEDS the value of the coverage they had when they retired. I have only been retired from that employer five years, and though my costs have increased noticeably, my former employer still pays more than they did when I commenced retiree medical coverage in 2010.

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    • Your view on this topic never ceases to amaze me. You and I know full well GE and many others could afford to do what they said they would. They are taking advantage of the retiree population because it’s the easiest group to deal with. This is no different than if they told them they were cutting their pension payment once started which they can’t do. Forget the corporate speak, either you do the right thing or you don’t. It’s not a matter of survival for these companies. How often do they take back stock options or long-term bonuses once granted?

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      • “You and I know full well GE and many others could afford to do what they said they would. …It’s not a matter of survival for these companies.” I agree that it is probably not a matter of survival.

        But, NO, they are doing exactly what they said they would do, including reserving the right to provide MORE or LESS in the future. Benefits are delivered per the written, contractual terms of the plan document – not based on past awards, coverage, or any other feature.

        Certainly, they could AFFORD to double pension accruals and give everyone a 10% across the board pay increase.

        They could give everyone a new car. A chocolate sundae.

        There are a lot of things GE could do, but, that is not the issue here. The issue here is what do they believe is the right answer for employees, current and past, in terms of rewards. And, obviously, they have concluded that they don’t want to continue to do what they have done in the past with regard to retiree medical.

        “This is no different than if they told them they were cutting their pension payment once started which they can’t do.”

        No, this is dramatically, totally different. A US pension accrual, once vested, can’t be reduced except by underfunding the plan and dumping it on the PBGC (so that other, better funded defined benefit pension plans have to shoulder the burden). And, they even changed that bedrock rule for pensions with regard to underfunded multiemployer pension plans – because the unions and management colluded to promise more and more and more but then they colluded to deliberately underfund those plans.

        Remember, as I indicated above, if GE wanted to vest the retiree health coverage they could. They didn’t! Today, tomorrow, nothing stops them from vesting that benefit. Obviously, INTENTIONALLY, they decided not to vest retiree medical – and they INTENTIONALLY provided adequate notice of their intent, and communicated the bounds of their commitment, so that the courts would not conclude that they inadvertently committed to continue retiree medical coverage without change, indefinitely.

        You ask, “… How often do they take back stock options or long-term bonuses once granted?…”

        You might also ask how often do those contingent elements of compensation not pay off. My bet is much more frequently than GE cuts base salaries for the rank and file. If a rank and file employee is earning $20 a hour at GE, does that commit GE to always paying that individual $20 a hour, and does it commit GE to continuing his employment and current duties indefinitely? NO, obviously. No such commitment was made just because today they are paying her $20 an hour as a millwright. The comparison to executives contingent compensation is false. Obviously, many firms structure executives’ total compensation to place some of their total rewards at risk based on performance/results. Whereas, the rank and file don’t get that stuff, it is primarily because many would prefer not to have any of their direct compensation at risk based on corporate, enterprise, business unit, or team performance.

        Simply, it is still true that if GE or other companies wanted to vest retiree medical, they would have. If GE wanted to always continue a pension accrual rate for current employees that is no lower than it was at the highest point in their working careers, they could (but be careful about backloading and other IRS rules). The fact that they once provided a benefit, a specific level of wages, for a specific position, and they no longer do, or no longer provide the same level of accruals/inflation-adjusted value, does not mean that they made some commitment and are now backing away from it. OBVIOUSLY, they did’t make such a commitment or we would be hearing about the class action lawsuits. And, that may yet happen.

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  3. Promises made to retirees should be viewed with all the permanence of a Hollywood marriage. Whether it is healthcare or pensions, public or private, change is inevitable. Before 1984 social security wasn’t taxed. Although not an explicit no tax promise from the government it certainly changed the value of the benefit. It will be interesting in the future to watch what happens to retiree promises as more and more pension plans blow up especially in the public sector.

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