Widows' Lament
As Companies Cut Spousal, Death Benefits for Retirees, Survivors Suffer More Loss
By Ellen E. Schultz, Staff Reporter
June 29, 2005

Margaret Jelly's husband, William, was dying of cancer in January 2003 when the couple received a letter telling them that the death benefit an employer promised him decades ago would be canceled -- in one month.  "I guess I'm going to have to die before then," Mr. Jelly, 79, told his wife of 50 years.

He wasn't joking.  Both of them knew that Mrs. Jelly would need the money when her husband's leukemia overtook him.  His pension would be cut in half upon his death, and six months later, Mrs. Jelly's spousal retiree health coverage would end.  The Middletown, N.J., couple planned to use the death benefit of $39,000 for medical and burial costs.

It's no secret that companies have been cutting benefits for retirees.  But the hardships are magnified for their widows because of various practices adopted by large employers over the past two decades.  The surprising result is that many women -- the last generation of stay-at-home wives, married to men with generous retirement benefits -- are ending up with little or no benefits other than Social Security.

Nowhere is this more clearly illustrated than among telephone industry retirees, who enjoyed some of the best benefits packages in the country.

Mrs. Jelly should have had a secure retirement.  Mr. Jelly had fought in Italy in World War II, and then began a career as an electrician at Western Electric, then a unit of AT&T Corp.  There were millions like him: ex-servicemen and others swelling the post-war workforce.  Although companies were growing rapidly and competing for workers, they couldn't afford high wages, so employers offered deferred compensation in the form of pensions, and health care in retirement.

Pay was low but so were living costs.  He and Margaret married in 1950, and by 1954, when the first of their three children was born, Mr. Jelly was making just $64 a week, but building up retirement benefits.

When Mr. Jelly retired in 1980, he had a pension from Western Electric and options about how he wanted to receive it:  he could elect a pension in monthly payments over his lifetime only, or he could elect a "survivor's option" -- a smaller monthly pension, which would drop by half when he died, but last over his widow's lifetime.  Mr. Jelly chose the survivor's option.

But as the millions of people who entered the workforce after WWII began moving into retirement and drawing on the trillion dollars of deferred benefits, companies began looking for ways to cut benefits and hang onto the money.  Meanwhile, by the early 1990s, changes in accounting rules gave employers an additional incentive to cut retiree benefits: doing so reduced liabilities they had recorded, which generated gains that boosted income.

Many employers began cutting pensions for future retirees.  AT&T, for example, converted traditional pensions to a type called a "cash-balance" plan in 1998.  By calculating pensions in a different way, with the result that the pensions its employees earned in their last years didn't mount as fast as before, AT&T was able to reduce future pension payouts to retirees and their widows by more than $1 billion.

Employers also began to cut retiree medical and death benefits for current or future retirees.  These typically provide a surviving spouse a payment equal to one-times the retiree's annual salary at the time of retirement.  And they began cutting retiree group life insurance, which may also provide an amount equal to a year's salary, but often expires when the retiree reaches age 65.

Companies that have eliminated life insurance for certain retirees in recent years include Qwest Communications International Inc., Pathmark Stores Inc., St. Paul Travelers Cos Inc., and Solutia Inc.  This year, CNA Financial Corp. reduced the benefit to a maximum of $10,000 per retiree.  Phelps Dodge Corp. has announced it will eliminate coverage for people who don't retire by the end of this year.

Cutting retiree life insurance and death benefits also boosts income.  In 2003, when NCR Corp. eliminated retiree life insurance for future retirees, the move added $12 million in gains to income in the third quarter that year.

The Jellys weren't affected by AT&T's pension move.  (Federal law doesn't permit a company to alter a pension once a person has retired.)  But the couple's other benefits weren't as secure.

In 1996, AT&T spun off certain operations, including what remained of Western Electric, into a new company, Lucent Technologies Inc. Lucent, of Murray Hill, N.J., imposed a series of changes.  First, it told management employees that if they retired on or after Jan. 1, 1998, they wouldn't get a death benefit.  Then in 2003 it told existing retirees who had been managers, including Mr. Jelly, that their death benefits were no more.  By eliminating the death benefit, Lucent was able to keep more than $464 million that would have been paid out in the future to tens of thousands of widows (and widowers).  Last year, the company made more cuts in retiree health benefits.

Thanks in large part to benefit cuts, Lucent's retiree benefits plans have added a net total of $1.1 billion to income since the company started, including $868 million in the fiscal year ended Sept. 30, according to its annual report filed in December.

In a statement, Lucent said, "Eliminating the death benefit was one of the very difficult decisions we had to make over the past few years," and added that "It is also important to note that the death benefit was a benefit provided at Lucent's discretion, and funded from Lucent's pension plan, but it was not an accrued, vested or protected benefit."

Recently retired workers are finding themselves grappling with the benefits reductions -- especially those whose pensions were reduced by the pension conversion.  But retirees who made irrevocable pension decisions decades ago -- and then found their other retirement benefits cut -- have been slammed the hardest.

George Sharpe worked for Bell Laboratories for 34 years, setting up missile programs in places like Cape Canaveral, Fla. and White Sands, N.M.  When he retired in 1975 at age 59, he elected a single-life pension, which was $34,080 a year.

When Mr. Sharpe, who suffered from Alzheimer's disease, died in December of 2003, his pension check ended.  Although his widow, Connie, could have kept her health coverage if she paid 100% of the costs, she can't afford what Lucent was charging -- $280 a month, as of Jan 1, 2005;  so she pays $133 a month for a plan from AARP.

Mrs. Sharpe, who is 80 and lives in Las Cruces, N.M., is cashing in CDs and living on Social Security of $915 a month.  "If I don't live too long, I won't have to go on welfare," she says.  Late last year, Mrs. Sharpe, who has no children, adopted a six-year old Australian shepherd, Keno, despite her worries about paying for his food and veterinary care.  "I have nobody," she says.

The benefits cuts have led many retirees to regret the decisions they made about their pensions long ago.  When Lew Coppes, 66, retired from AT&T in 1989 after 33 years, he and his wife, Joanne, elected to get a pension over his life only (rather than a reduced pension over both their lives), because they had ample savings in his company savings plan, invested in AT&T stock, group life insurance and a death benefit of $60,000.

After the spinoff, however, his AT&T shares converted automatically to Lucent shares, and their value plummeted to $20,000 from $250,000, though he says he has no one but himself to blame for not diversifying the money.  His health premiums have risen, he's lost dental benefits, and his death benefit is gone.  He had a serious heart attack in 2001, and in October last year he had a cardiac defibrillator implanted, "and couldn't afford life insurance even if I could get it," he says.

Mr. Coppes, who lives in Tucson, is working six days a week from his home buying and selling electronic equipment.  "I figure I'm good for another three to four years," he says.  "I'm trying to build up a nest egg for my wife, because my pension dies when I do."

In early January 2003, when Mr. Jelly, the Western Electric retiree with leukemia, got Lucent's letter informing him the death benefit would be paid only if the retirees died before Feb. 3, he figured the odds were good that he'd make the cut.  After five years of fighting cancer, he was failing, and he went back into the hospital Jan. 14 for what he and his wife knew would be the last time.  He told her sardonically, "I have a deadline."

He didn't make it.  He celebrated his 80th birthday in the hospital on Feb. 14, which was also his and Margaret's 50th Valentine's Day together.  The nurses had a small party for him.  He died on Feb. 24, 2003.  Lucent saved $39,000.

Write to Ellen E. Schultz at ellen.schultz@wsj.com