ASSESSING RETIREE HEALTH LEGACY COSTS:

IS AMERICA PREPARED FOR A HEALTHY 

RETIREMENT?

HEARING

BEFORE THE 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS 

OF THE 

COMMITTEE ON EDUCATION AND 

THE WORKFORCE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, MAY 16, 2002 

Serial No. 107-64 

Printed for the use of the Committee on Education 

and the Workforce

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WASHINGTON : 2002 

81-195 pdf 

For sale by the Superintendent of Documents, U.S. Government Printing Office 

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ii

COMMITTEE ON EDUCATION AND THE WORKFORCE 

JOHN A. BOEHNER, Ohio, Chairman 

THOMAS E. PETRI, Wisconsin GEORGE MILLER, California 

MARGE ROUKEMA, New Jersey DALE E. KILDEE, Michigan 

CASS BALLENGER, North Carolina MAJOR R. OWENS, New York 

PETER HOEKSTRA, Michigan DONALD M. PAYNE, New Jersey 

HOWARD P. “BUCK” McKEON, California PATSY MINK, Hawaii 

MICHAEL N. CASTLE, Delaware ROBERT E. ANDREWS, New Jersey 

SAM JOHNSON, Texas TIM ROEMER, Indiana 

JAMES C. GREENWOOD, Pennsylvania ROBERT C. “BOBBY” SCOTT, Virginia 

LINDSEY O. GRAHAM, South Carolina LYNN C. WOOLSEY, California 

MARK E. SOUDER, Indiana LYNN N. RIVERS, Michigan 

CHARLIE W. NORWOOD, JR., Georgia RUBEN HINOJOSA, Texas 

BOB SCHAFFER, Colorado CAROLYN McCARTHY, New York 

FRED UPTON, Michigan JOHN F. TIERNEY, Massachusetts 

VAN HILLEARY, Tennessee RON KIND, Wisconsin 

VERNON J. EHLERS, Michigan LORETTA SANCHEZ, California 

THOMAS G. TANCREDO, Colorado HAROLD E. FORD, JR., Tennessee 

JIM DeMINT, South Carolina DENNIS KUCINICH, Ohio 

JOHNNY ISAKSON, Georgia DAVID WU, Oregon 

BOB GOODLATTE, Virginia RUSH D. HOLT, New Jersey 

JUDY BIGGERT, Illinois HILDA L. SOLIS, California 

TODD RUSSELL PLATTS, Pennsylvania SUSAN DAVIS, California 

PATRICK J. TIBERI, Ohio BETTY McCOLLUM, Minnesota 

 RIC KELLER, Florida 

 TOM OSBORNE, Nebraska 

 JOHN ABNEY CULBERSON, Texas 

 JOE WILSON, South Carolina 

Paula Nowakowski, Chief of Staff 

 John Lawrence, Minority Staff Director

 SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS 

 SAM JOHNSON, Texas, Chairman

JIM DeMINT, South Carolina ROBERT E. ANDREWS, New Jersey

JOHN BOEHNER, Ohio DONALD M. PAYNE, New Jersey 

MARGE ROUKEMA, New Jersey DALE E. KILDEE, Michigan 

CASS BALLENGER, North Carolina LYNN N. RIVERS, Michigan 

PETER HOEKSTRA, Michigan CAROLYN McCARTHY, New York 

HOWARD P. “BUCK” McKEON, California JOHN F. TIERNEY, Massachusetts 

THOMAS G. TANCREDO, Colorado HAROLD E. FORD, Jr., Tennessee 

PATRICK J. TIBERI, Ohio 

JOE WILSON, South Carolina 
iii

Table of Contents 

OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, SUBCOMMITTEE ON 

EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE 

WORKFORCE ............................................................................................................................... 2

OPENING STATEMENT OF RANKING MEMBER ROBERT ANDREWS, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON 

EDUCATION AND THE WORKFORCE..................................................................................... 3

STATEMENT OF SYLVESTER J. SCHIEBER, Ph.D., VICE PRESIDENT FOR RESEARCH 

AND INFORMATION, WATSON WYATT WORLDWIDE, WASHINGTON, D.C. ............... 5

STATEMENT OF LOUISE NOVOTNY, ASSISTANT DIRECTOR OF RESEARCH, 

COMMUNICATIONS WORKERS OF AMERICA, WASHINGTON, D.C................................ 7

STATEMENT OF H. FRED MITTELSTAEDT, PROFESSOR, MENDOZA COLLEGE OF 

BUSINESS, UNIVERSITY OF NOTRE DAME, NOTRE DAME, IN........................................ 9

STATEMENT OF VINCENT E. KERR, M.D., DIRECTOR OF HEALTHCARE 

MANAGEMENT, FORD MOTOR COMPANY, DEARBORN, MI.......................................... 11

APPENDIX A - WRITTEN OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON 

EDUCATION AND THE WORKFORCE................................................................................... 27

APPENDIX B - STATEMENT OF SYLVESTER J. SCHIEBER, Ph.D., VICE PRESIDENT 

FOR RESEARCH AND INFORMATION, WATSON WYATT WORLDWIDE, 

WASHINGTON, D.C................................................................................................................... 33

APPENDIX C - STATEMENT OF LOUISE NOVOTNY, ASSISTANT DIRECTOR OF 

RESEARCH, COMMUNICATIONS WORKERS OF AMERICA, WASHINGTON, D.C....... 69

APPENDIX D - STATEMENT OF H. FRED MITTELSTAEDT, PROFESSOR, MENDOZA 

COLLEGE OF BUSINESS, UNIVERSITY OF NOTRE DAME, NOTRE DAME, IN............. 77

APPENDIX E - STATEMENT OF VINCENT E. KERR, M.D., DIRECTOR OF 

HEALTHCARE MANAGEMENT, FORD MOTOR COMPANY, DEARBORN, MI.............. 95
iv

APPENDIX F – SUBMITTED FOR THE RECORD, LETTER FROM VINCENT E. KERR, 

M.D., DIRECTOR, HEALTHCARE MANAGEMENT, FORD MOTOR COMPANY, TO 

CHAIRMAN SAM JOHNSON AND RANKING MEMBER ROBERT ANDREWS, 

SUBCOMMITTEE ON EMPLOYER-EMOLOYEE RELATIONS, COMMITTEE ON 

EDUCATION AND THE WORKFORCE, JUNE 10, 2002...................................................... 103

APPENDIX G – SUBMITTED FOR THE RECORD, “RESPONSE TO QUESTION 

REGARDING TAX DEDUCTIONS FOR PREFUNDING RETIREE HEALTHCARE”, H. 

FRED MITTELSTAEDT, MAY 23, 2002................................................................................. 107

APPENDIX H – SUBMITTED FOR THE RECORD, STATEMENT FROM MICHAEL S. 

GORDON, GENERAL COUNSEL, ON BEHALF OF THE NATIONAL RETIREE 

LEGISLATIVE NETWORK (NRLN), WASHINGTON, D.C., MAY 28, 2002 ...................... 111

APPENDIX I – SUBMITTED FOR THE RECORD, STATEMENT FROM CHRISTINE 

OWNES, DIRECTOR, PUBLIC POLICY DEPARTMENT, AFL-CIO, WASHINGTON, D.C., 

MAY 28, 2002 ............................................................................................................................ 123

Table of Indexes.......................................................................................................................... 137 
1

HEARING ON ASSESSING RETIREE HEALTH LEGACY COSTS: 

IS AMERICA PREPARED FOR A HEALTHY RETIREMENT? 

____________________

Thursday, May 16, 2002 

Subcommittee on Employer-Employee Relations 

Committee on Education and the Workforce 

 U.S. House of Representatives 

Washington, D.C. 

 The Subcommittee met, pursuant to notice, at 10:30 a.m., in Room 2175, Rayburn House 

Office Building, Hon. Sam Johnson, Chairman of the Subcommittee, presiding. 

 Present: Representatives Johnson, DeMint, Tiberi, Wilson, Andrews, Kildee, Rivers, and 

Tierney.

 Staff present: Kristin Fitzgerald, Professional Staff Member; David Connolly, Jr., 

Professional Staff Member; Dave Thomas, Legislative Assistant; Ed Gilroy, Director of Workforce 

Policy; Kevin Smith, Senior Communications Counselor; Heather Valentine, Press Secretary; 

Patrick Lyden, Professional Staff Member; and, Deborah L. Samantar, Committee Clerk/Intern 

Coordinator.

Camille Donald, Minority Counsel, Employer-Employee Relations; Michele Varnhagen, Minority 

Labor Counsel/Coordinator; and, Dan Rawlins, Minority Staff Assistant/Labor.

Chairman Johnson. A quorum being present, the Subcommittee on Employer-Employee 

Relations will come to order. 
2

Good morning. The Subcommittee today is meeting to hear testimony on assessing retiree 

health legacy costs. I extend a warm welcome to all of you and thank you for being with us today.

And I know your time is precious and some of you need to catch planes, so we will get on with it. I 

appreciate the ranking member, Mr. Andrews, and my other colleagues being with me today. 

OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, 

COMMITTEE ON EDUCATION AND THE WORKFORCE

 Today's hearing focuses on retiree health legacy costs and whether or not America is going 

to be prepared for a healthy retirement. This is our second hearing on retiree healthcare. In our 

first hearing, we heard testimony about how retirees are less likely to have access to employersponsored retiree healthcare. In fact, only 35 percent of employers still offer the benefit. 

 What does this mean? Well, clearly, many retirees are not going to be able to rely on an 

employer-provided plan. Instead, retirees must begin to prepare for their own healthy retirement, 

much as today's workers save their own money in a 401(k) account for future pensions. 

 Today's hearings can help determine why, I hope, employers are making changes to their 

retiree health benefits. We will hear a discussion of the retiree health obligations, known as legacy 

costs in some areas, and of a broad section of industries, as well as the factors that influence 

employers' decisions to reduce or eliminate retiree health benefits. We will also hear about the 

experience of Ford Motor Company and how they are able to balance the growing financial 

obligations of retiree health benefits with the needs of their employees during retirement. 

 Employers voluntarily provide healthcare for workers and for retirees. Unfortunately, the 

rising cost of coverage and the retirement of baby boomers make it difficult for employers to 

provide these benefits. Another obstacle employers face in providing healthcare is that, unlike the 

pension system, current law discourages employers' ability to pre-fund retiree healthcare.

Increasingly, employers who offer retiree health benefits find themselves at a financial 

disadvantage with competitors who do not offer the benefit. And those companies that continue to 

offer retiree health benefits are adopting innovative changes to balance the cost of retiree health 

obligations with their desire to provide the benefit for employees. 

 As you know, the steel industry has an enormous retiree health legacy cost. However, 

retiree health legacy costs are spread across many industries. I would like to draw your attention to 

the chart we have displayed over there with the top 25 retiree health legacy costs of today's Fortune 

500 companies. For example, SBC Communications anticipates $20.1 billion in legacy costs; Bell 

South $6.3 billion; Lockheed $3.1 billion. That is a lot of money even for Texas companies. 

Employees of all sectors are facing the inevitability that they will have to shoulder a larger amount 

of the cost of their healthcare and retirement. And rather than rifle-shot remedies for specific 

industries, we ought to focus on all industries. 
3

 At our next hearing in our retiree health series we hope to investigate ways that government 

policy can make it easier for employers of all industries to offer healthcare. In addition, the 

Subcommittee will continue to study how to better prepare workers for their role in ensuring their 

own healthy retirement. Retiree health is serious business, and our nation's retirees need our help 

in order to ensure that they will have the resources that they need when they retire. 

 I look forward to working with my colleagues on the Subcommittee as we examine the 

issue. And right now I would like to welcome all of our witnesses, and we look forward to your 

testimony and the guidance it will offer us as we address the critical issue in front of us. 

WRITTEN OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, SUBCOMMITTEE ON 

EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE 

WORKFORCE – SEE APPENDIX A 

 Mr. Andrews, do you have a statement you would like to make before we get started? 

Mr. Andrews. I do. Thank you, Mr. Chairman. I would like to welcome the witnesses to the 

Subcommittee. I look forward to hearing about this very serious and important problem. And I 

appreciate the panelists giving us their time to address it this morning. 

OPENING STATEMENT OF RANKING MEMBER ROBERT ANDREWS, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

 The title of the hearing is “Assessing Retiree Health Legacy Costs: Is America Prepared for 

a Healthy Retirement?” I would answer that question by saying no we are not. And the evidence is 

rather compelling. The number of employers offering healthcare benefits to retirees is decreasing.

The amount of contributions that retirees themselves must make toward their healthcare costs is 

increasing rapidly. Coverage is being scaled back rather dramatically for people around the 

country.

 I think these trends are going to be exacerbated by two larger trends that we are facing. One 

is globalization. Those large employers on that list, without exception, are competing against 

international competitors in a global market. Many of those international competitors do not offer 

retiree health benefits; they come from countries that have socialized or publicly subsidized health 

systems that give those competitors an enormous advantage against American companies, who are 

bearing most or all of that cost themselves. 

 The second trend is the graying of our population. The so-called age wave that will hit in 

the next few decades when the baby boomers, such as myself, reach an age where we will hit 

retirement years. The number of people in the workforce will be less. The number of people in the 
4

retirement category will be more. Hopefully, people will live longer. The advances that we are 

making in nutrition and healthcare and medical science are going to give people the ability to live 

longer lives, and that is a blessing. But it is not an unmitigated blessing. There are some issues 

that are raised by it. 

 So I think the Chairman deserves credit for calling this very timely hearing. Some of the 

questions that I bring to the hearing that I would like to hear the panelists answer are the extent to 

which this is an accounting problem as opposed to a real economic problem. I think it is 

indisputable that the changes made in the accounting standards for years beginning after 1992 have 

had an impact on the way companies address the bearing of healthcare costs. I would be interested 

in hearing the panelists talk about the scope of that impact, whether they think any changes in that 

standard would be appropriate. And if there were changes in the standard, what benefit would it 

give us with respect to solving this problem. 

 Second, there is an option that we could pursue of publicly subsidizing more of retiree 

healthcare costs. The most obvious and dramatic increase in that subsidy would be the addition of 

a prescription drug benefit to the Medicare program since it would absorb a significant share of the 

cost that the remaining private plans are absorbing today. 

 Finally, I am interested in hearing the views of the panelists on various cost reduction and 

revenue increase strategies that employers have used. As many of you note in your written 

testimony, employers are asking employees, and/or requiring employees to contribute more. They 

are pursuing cost containment strategies that are designed to try to get more bang for the plan's 

buck. And it is important that we know the scope of the potential gain that could be had from 

pursuing these strategies as well as some of the very real human costs and human consequences of 

pursuing these strategies. 

 I’ll say at the outset of this that although the questions that I raise are fraught with partisan 

pitfalls, I don't regard this at all as a partisan problem. I regard this as a public service problem, a 

governmental problem that we are going to have to solve together. It is of note that the hearing is 

sparsely attended when it comes to the news media this morning. I don't fault the news media at 

least for that, and that is because we are talking about a problem here that has some immediate 

significance, as General Motors and other companies can tell us when they look at the net profit 

that they are reporting. But this is really a problem that is going to come to full fruition in the next 

decade or two. And I hope this quiet hearing that we are having this morning will make a valuable 

contribution to developing legislative proposals and eventually laws that will help fix this problem. 

 So I thank the Chairman for convening the hearing. I look forward to hearing the testimony 

of the witnesses. 

Chairman Johnson. Can you believe a baby boomer would say this is political? 

[Laughter.]

Mr. Andrews. I am just glad to be called a baby. 
5

Chairman Johnson. I hear you. 

 At this time, I would like to introduce our witnesses, and we appreciate all of you being 

here. Our first witness will be Mr. Syl Schieber, Vice President for Research and Information at 

Watson Wyatt Worldwide. Mr. Schieber has flown in from Berlin to be with us today, and I guess 

you have a plane to catch later today. We will try to get you out of here. 

 The second witness is Ms. Louise Novotny. Ms. Novotny is the Assistant Director of 

Research for the Communications Workers of America. 

 Our third witness is Mr. Fred Mittelstaedt. He is a professor at the University of Notre 

Dame. I know this is graduation there, and I thank you for being here. 

 Our fourth and final witness is Dr. Vincent Kerr. He is Director of Healthcare Management 

for the Ford Motor Company. Thank you, also. 

 Before the witnesses begin their testimony, I would like to remind Members that we will be 

asking questions of the witnesses after the entire panel has testified. In addition, Committee Rule 2 

imposes a five-minute limit on all questions. We have timer lights out there, which you all will 

see, which will give you five minutes. We hope you will be able to complete your opening remarks 

within that length of time. 

 I also would ask unanimous consent for the hearing record to remain open 14 days to allow 

Member statements and other extraneous material referenced during the hearing to be submitted in 

the official hearing record. Without objection, so ordered. 

 Having said that, Mr. Schieber, please begin your testimony. 

STATEMENT OF SYLVESTER J. SCHIEBER, Ph.D., VICE PRESIDENT 

FOR RESEARCH AND INFORMATION, WATSON WYATT WORLDWIDE, 

WASHINGTON, D.C. 

Mr. Chairman and Members of the Committee, thank you very much for inviting me here 

today to talk about this extremely important issue. The testimony that I present is my own and my 

prepared remarks, which I have submitted for the record, are about 30 pages long so I will 

summarize those at a fairly high level. 

 To cut to the point, employer-sponsored retiree health benefits are gradually being 

eliminated in this country. Even where benefits will continue to be offered in the future, the 

relative size of the benefit in comparison to actual health needs will be significantly reduced from 

what has existed until this time. 
6

 The natural tendency might be to criticize business for the elimination of these benefits and 

to find fault with the profit structure on which most of our economy is based. That would ignore 

the range of factors contributing to the reality of the situation we face. The real forces at play here 

are well known. First, our health sector has been plagued for decades by very high rates of cost 

inflation. Second, employers have been forced to offer retiree health benefits in a schizophrenic 

policy environment that essentially forces them to operate their plans on a pay-as-you-go basis but 

to account for the obligations as they accrue. Third, business conditions in an open economy are not 

dictated by the efficiency of the employer down the street or the employer in the next state but by 

the conditions in a highly competitive world marketplace. Fourth, investors in American business, 

especially institutional investors, have become increasingly demanding about how businesses are 

run. Finally, the demographics of our society are driving up the cost of all of our retirement 

programs. As a practical matter, we all want to maintain our retirement system. We just do not 

want to pay its costs. 

 I believe that federal policy is a major contributor to the environment that has resulted in 

persistent health inflation in this country. Federal expenditures on research and development in the 

health sector have increased 168 percent over the past decade. In growth terms, Federal 

Government expenditures are growing 4.9 times faster than other R&D that the government 

finances and 3.4 times faster than all federal expenditures. R&D in the health sector is expanding, 

crowding out other R&D that we do. 

 Research into increasing health expenditures in the U.S. consistently shows that technology 

is the major cost driver of health expenditures and health costs. We spend massive amounts of 

money to add new toys to the medical bag but spend virtually none to understand which of these 

toys are particularly effective in advancing the health of our society and making sure that 

healthcare practitioners understand the relative efficiency of alternative treatment regimens. 

 In the regulatory arena, employers have to account for the obligations they accrue as 

employees earn their retiree health benefits. But federal tax policy effectively precludes plan 

sponsors from funding their employees' benefits when they are being earned. 

 Today, many of the retirees who are receiving health benefits from their prior employer 

earned those benefits during the 1950's, 1960's, 1970's, and 1980's. But it is the workers and 

stockholders of 2002 who are paying for those benefits. Of the 50 largest industrial companies on 

the Fortune list from 1972, only 21 of them are still organized and operating as freestanding 

companies. Even among these companies that do still exist, virtually none of the senior managers 

running them in 1972 is still at the helm. And no one in 1972 could have anticipated the long-term 

effects of ERISA in terms of creating the massive accumulation of labor ownership in the capital 

basis of our economy through funded retirement plans. No one could have anticipated the 

magnitude of the obligations for retiree health benefits that would arise with aging workforces, in 

maturing industries, in an increasingly competitive world marketplace. No one could have 

anticipated that the collective owners of capital would be so demanding that business managers run 

their operations providing higher returns. I have little doubt that the managers of U.S. business 

were committed to keeping their healthcare promises when they made them many years ago. But 

they could not foresee the future any more than we can today. They were making a promise they 
7

could not keep. 

 It makes no economic sense for public policy to create an environment where employers 

create promises for workers to be paid in the distant future when those promises cannot be secured 

when they are earned. Making realistic retiree medical promises and keeping them requires the 

opportunity for employers and employees to secure retiree health benefits through pre-funding.

One major motivation behind the adoption of ERISA in 1974 was to secure the retirement benefits 

that employers promised their employees through their defined benefit plans. Congress adopted 

ERISA to secure such benefits across time and across varying economic circumstances. From a 

public perspective, providing tax incentives for funding of retiree medical benefits is the best 

approach to preserve retiree medical benefits for the future. 

 Back in the early 1980's, policy-makers decided employers should not be allowed to fund 

retiree health benefits in the same way they pre-fund pensions, because policy-makers worried 

about the lost federal tax revenues. But if the promises made to people making steel in the 1980's 

were funded on the basis of their productivity at that time, we would not be sitting here today 

worrying about how these folks can survive the economic transition that is now under way in their 

industry. If the conclusion had been reached at that time that the cost of these benefits was too high 

for employers and their workers, the promises would not have been made, because people would 

not have been willing to fund them. But there would not have been the promise. 

 The policy I recommend makes sense for employers, their employees, and the government. 

I ask that you seriously consider it. 

 Thank you very much. 

STATEMENT OF SYLVESTER J. SCHIEBER, Ph.D., VICE PRESIDENT FOR RESEARCH 

AND INFORMATION, WATSON WYATT WORLDWIDE, WASHINGTON, D.C. – SEE 

APPENDIX B 

Chairman Johnson. Thank you, sir. Your entire testimony will be entered into the record. 

Ms. Novotny, you may begin. 

STATEMENT OF LOUISE NOVOTNY, ASSISTANT DIRECTOR OF 

RESEARCH, COMMUNICATIONS WORKERS OF AMERICA, 

WASHINGTON, D.C. 

Thank you, Mr. Chairman and Members of the Subcommittee. I am pleased to be given the 

opportunity to speak with you this morning about our experience with retiree healthcare benefits.

We have just concluded negotiations in the recent months with two of our major employers, one, 
8

AT&T, and the other, Cincinnati Bell. And at both of those tables retiree benefits were a key issue 

and indeed a critical issue that held up negotiations in some instances and forced us into some 

important conclusions in others. 

 As you all may know, bargaining for retirees is a really tricky business. As a union, we can 

bargain for retirement benefits for active employees and our employers are obligated to bargain 

with us over that. It is a mandatory subject of bargaining. But bargaining for those who are 

already retired is permissive. So I actually want to applaud those employers that do provide those 

health benefits voluntarily because, again, we know how difficult it is to do that. 

 We have as a union made retiree health benefits a key point of our negotiations for many 

years. We first negotiated them in the 1960's. But we feel these benefits are important to all our 

retirees. For those age 65 and older, they tend to supplement Medicare and help with the serious 

cost-sharing requirements of the Medicare program. And, in addition, cover key benefits not 

covered by Medicare, prescription drugs being most notable. 

 But the benefit package is possibly more valuable still to those who are under age 65, and 

we are feeling this acutely now in recent years. In the telecommunications industries, there has 

been massive downsizing for all of our employers. Our members have been forced to take early 

retirements. If they were to go out in the individual health insurance market, they would find the 

cost of that coverage prohibitive. So, again, when we bargain, we consider retiree health as one of 

our most important obligations. 

 In 1989, I want to take us back a little bit, when we were bargaining, the companies came to 

us with a proposal to cap the amount of contributions they would make to retiree healthcare, and 

that was in response to the proposal by the Financial Accounting Standard Board, which came to be 

known as FAS 106. Under that rule, employers were to begin accruing for the projected cost of 

retiree benefits over the working lives of the employees, as Mr. Schieber has just mentioned. And 

at the time, our employers booked those costs only on a pay-as-you-go basis. At that time, to give 

an example of the magnitude of the new requirement, when we were bargaining with AT&T, they 

provided us with the information that showed that their total benefit obligation, if they were to 

adopt the FASB rule and cover our benefits as is, would have been a $9.5 billion new obligation on 

their books, with an annual expense of $1.7 billion. 

 We agreed then in negotiations. We recognized this problem that it was causing our 

companies. We agreed to cap the retiree health benefits, meaning that if the costs were to rise 

above those caps, then our retirees would be obligated to pay the difference. Recognizing that 

vulnerability, we negotiated several safeguards that we expected or hoped would provide additional 

protections. Those included grandfathering the already retired workers so that they would never be 

required to pay, setting the caps at high enough levels to preclude any retiree cost sharing for over a 

period of years, waiving the obligation for retirees to pay during a contract term. And that 

stipulation obviously had to be renegotiated year after year. 

 Another level of protection that we did not have before was to be able to link the level of 

retiree benefits to the level of benefits that were being provided to our active employees. In the 

past, when a worker retired, they carried the level of benefits they had at the time of retirement. 
9

There were no improvements over time. And, finally, we agreed that we would negotiate over the 

scope and level of retiree benefits and the caps in the future so that permissive subject of 

bargaining became an agreed upon subject of bargaining. 

 We also bargained for trusts to pre-fund retiree health benefits, Voluntary Employee 

Benefit Accounts, or trust VEBAs, to help offset the company's liability. And these approaches 

helped us to stave off the costs for some years, but in subsequent years we continued to bargain, to 

come up with creative solutions to the problem, including at one point bargaining Medicare HMOs, 

which, as you know, soon left the market, so that did not become a solution. 

 In asking for recommendations, what we would hope to see is some kind of relief for the 

employers who have responsibly tried to provide these retiree health benefits, and that would 

include Medicare prescription drug costs to help relieve their cost burden. 

 Thank you. 

STATEMENT OF LOUISE NOVOTNY, ASSISTANT DIRECTOR OF RESEARCH, 

COMMUNICATIONS WORKERS OF AMERICA, WASHINGTON, D.C. – SEE APPENDIX C 

Chairman Johnson. Thank you, ma'am. I appreciate your statement. 

Mr. Mittelstaedt, you may begin your testimony. 

STATEMENT OF H. FRED MITTELSTAEDT, PROFESSOR, MENDOZA 

COLLEGE OF BUSINESS, UNIVERSITY OF NOTRE DAME, NOTRE 

DAME, IN

Thank you. Mr. Chairman and Members of the Committee. I am pleased to be here to share 

with you some of my research findings and thoughts on retiree health benefits. I hope that my 

remarks assist the Committee in its deliberations on this very important issue. 

 Many of these plans began in the 1950's when both healthcare costs and life expectancies 

were lower. The benefits were prevalent in large manufacturing firms, which at the time had high 

ratios of active employees to retirees. As longevity and healthcare costs increased, firms became 

more reluctant to offer these benefits. Consequently, today, retiree health benefit liabilities are 

primarily a problem for old, large, capital-intensive firms. These firms also often have numerous 

union employees. 

 Until the early 1990's, annual expense generally equaled the annual cash outlays for retiree 

health benefits. These are termed pay-as-you-go costs. Expenses were not accrued for the expected 

future payments associated with current employees or retirees. The pay-as-you-go costs were not 

even disclosed until mid-1980. In December of 1990, the FASB passed FAS 106, requiring firms 
10

to change to an accrual basis of accounting. 

 Most retiree health plans were not pre-funded, in part due to the absence of tax incentives.

In addition, because most firms had been accounting for the benefits on a cash basis, most of their 

retiree health benefit liabilities were not on their balance sheets. Consequently, upon adoption of 

FAS 106, most firms had large liabilities that had to be recognized. Firms could recognize this 

liability immediately or delay recognition by expensing it over a period not to exceed 20 years. 

 Numerous studies show that investors reduce share prices in proportion to the magnitude of 

retiree health benefit liabilities, both before and after adoption of FAS 106. The effects of FAS 106 

vary greatly across industries, but the negative effects were most pronounced in capital-intensive

manufacturing industries. Near the time that FAS 106 was passed, there was a noticeable increase 

in the number of firms reducing benefits. 

 One of my research projects examined the prevalence of the reductions and the motivations 

behind them. We found that about one-third of our sample firms reduced benefits. The most 

common types of changes were capping employer contributions and increasing co-payments. In 

the majority of instances, firms limited the effect on existing retirees. 

 With regard to motivation for the plan reductions, we found that 89 percent of healthcare 

benefit reductions were made within one year of FAS 106's adoption. Only 11 percent of the 

healthcare reductions were made prior to 1990, even though the U.S. medical inflation rate greatly 

exceeded the general inflation rate throughout the 1980's. In addition, firms with high FAS 106 

liabilities and high existing debt were more likely to reduce benefits. Results also indicated that 

firms cutting healthcare benefits were financially weaker than no-cut firms but the results for 

increased healthcare costs were mixed. 

 These findings are consistent with managers attempting to reduce current or expected 

contracting costs associated with obtaining capital. An alternative explanation is that in complying 

with FAS 106, managers may have recognized that their firms could not afford the promised 

benefits. Under this reasoning, FAS 106 accelerated decisions that would have been made over a 

longer period of time as it became clear that the obligations could not be honored. We inferred 

from the findings that different debt or labor contracts would have been written if FAS 106 

requirements had always been present. 

 Although we used data from the early 1990's, I believe that the studies findings are still 

relevant today. Firms with high retiree health benefit liabilities and high other debt obligations will 

experience the most pressure to reduce benefits. In addition, if firms experience cash flow or 

income shortfalls, they will be more likely to reduce retiree health benefits. 

 I have just a few concluding remarks. Private retiree health benefit plans represent an 

important source of wealth to millions of U.S. citizens. Old, large, capital-intensive firms primarily 

sponsor these plans. Firms with the largest liabilities are in industries, such as automobiles, 

telecommunications, aircraft, industrial equipment, steel, and air transport. However, some firms 

in almost every industry sponsor these types of plans. Because of the breadth of coverage, I 

believe that it would be difficult for the U.S. government to justify giving relief to just one 
11

industry.

 Over the past decade, firms sponsoring retiree health benefit plans have tried to reduce their 

exposure to rising medical costs by modifying plan agreements. I believe that the decisions of 

these firms to modify rather than end benefits suggest that managers wish to maintain good 

relations with labor and also provide some income security to their firms' retirees. However, firms 

do not wish to be at risk for rising healthcare costs and changes to Medicare over the next 50 years.

Consequently, many younger employees at these firms will not have retiree medical benefits and 

many middle-age workers will have lower benefits than current retirees. 

 Congress may wish to slow the decline by offering additional incentives to business. If the 

decline continues, then Congress may wish to encourage more education on retirement planning. If 

workers do not plan early for potential medical costs during retirement, they may not be able to 

afford needed medical care or they may become destitute trying to pay for it. 

 Thank you. 

STATEMENT OF H. FRED MITTELSTAEDT, PROFESSOR, MENDOZA COLLEGE OF 

BUSINESS, UNIVERSITY OF NOTRE DAME, NOTRE DAME, IN –SEE APPENDIX D 

Chairman Johnson. Thank you, Mr. Mittelstaedt. 

Dr. Kerr, you may begin your testimony. 

STATEMENT OF VINCENT E. KERR, M.D., DIRECTOR OF HEALTHCARE 

MANAGEMENT, FORD MOTOR COMPANY, DEARBORN, MI 

Good morning, Chairman Johnson, Ranking Member Andrews, and the rest of the 

Committee. It is a pleasure to be here before you this morning to discuss Ford Motor Company's 

retiree health coverage, in listening to Mr. Mittelstaedt, one of those old, large, capital-intensive 

companies. I feel older already. 

 I am the Director of healthcare management for Ford Motor Company. And in this position 

I am responsible for all of Ford's healthcare programs, including occupational health and safety, 

workers' compensation, and the healthcare benefits for employees, retirees, and their dependents. 

 I commend you for convening this Subcommittee, because this is a very important issue 

that we have before us. And in my statement today, I would like to discuss Ford's experience in 

providing healthcare benefits to our retirees and the challenges we face in continuing to provide 

this coverage. And I want to do this in order to assist Congress in its efforts to understand the state 

of employer-sponsored healthcare, particularly for retirees. We believe this is a critical issue. 
12

 In the U.S., Ford provides healthcare coverage for over 560,000 employees, retirees, and 

their dependents. We are located in all 50 states. And in 2001, our cost, including FAS 106 

liability, was $2.5 billion. The 2001 costs represented a 25 percent increase over 2000. And of that 

$2.5 billion that we spend or that we have in cost, retiree healthcare accounted for $1.6 billion, a 

little over half, although in our population retirees are slightly less than half of the population. 

 One of the key factors driving our healthcare costs, particularly among our retirees, is 

prescription drugs. And several factors have contributed to this steady growth in prescription drug 

costs. I think you are familiar with them, utilization, primarily. Our retirees are taking more 

prescription drugs, like much of the population, and the costs of those drugs have increased.

Pharmacy costs have been rising at an alarming rate, 14 percent in 2000, 15 percent in 2001, and 

we are projecting a 15 percent increase in 2000 compared to the recent CBO study which projected 

that spending would increase 10.1 percent per person every year for the next 10 years. When you 

look at our estimated $550 million spend in drugs, we will double that number by 2009 to over a 

billion.

 Ford Motor Company provides comprehensive retiree health benefits. Eligibility is based 

on age and years of service. If you have been with the company for 30 years, you can retire at any 

age or at 55 with at least 10 years of service and receive these benefits. We offer a variety of 

healthcare options, including traditional or fee-for-service plans, PPO's, health maintenance 

organizations, to our population. 

 The healthcare coverage that we offer is the primary healthcare benefit for younger retirees 

who are not eligible for Medicare. And when they are Medicare-eligible, the transition is seamless 

in that we provide secondary coverage for the benefits that Medicare does not provide. Faced with 

the many challenges in maintaining the delivery of these healthcare benefits to our employees, 

retirees, and their dependents, Ford has undertaken a variety of initiatives to try to both improve the 

quality and help manage the cost of delivering these benefits. 

 We have focused on quality in the health plans that we offer through certification. A 

number of efforts by the company are in combination with GM, the UAW, and other entities to 

improve quality in terms of the selection of the healthcare that our members receive, through 

hospital profiling, which gives information on the quality of the services of individual providers, 

and by focusing on patient safety. Many of you are familiar with the recent IOM reports stating 

that the kind of care we receive in the U.S. perhaps is not justified based on the cost that we pay for 

it.

 We have also undertaken a number of cost-sharing initiatives, increasing the contributions 

that our salaried retirees pay and on prescription drugs with tiered co-pays, using mail order drugs 

and discounts, and some direct to provider initiatives. 

 These alone I don't think are enough to stem the tide that we face, which Mr. Andrews 

referred to in terms of the deluge that will follow for us baby boomers as we enter retirement. So I 

would like to sum up with perhaps a few suggestions for your consideration.
13

One is Medicare reform, including prescription drug coverage. Medicare's current 

eligibility age should be maintained, since raising it will fail to address the underlying cost issues 

for the country as a whole and may have adverse impact in terms of employers' ability to sponsor 

healthcare coverage. Employers who voluntarily establish or maintain retiree coverage should not 

be discouraged from doing so through payroll taxes for example or other interventions or through 

mandates, which I believe would have this effect. We need to more aggressively encourage and 

allow the use of generic drugs, which are as effective and cheaper, and look carefully at the 

legislation that exists to encourage that. 

 As I said, reject benefit mandates, and promote safety and quality in the care that we 

receive.

 Thank you for allowing me to testify today. 

STATEMENT OF VINCENT E. KERR, M.D., DIRECTOR OF HEALTHCARE 

MANAGEMENT, FORD MOTOR COMPANY, DEARBORN, MI – SEE APPENDIX E 

Chairman Johnson. Thank you, sir. I wonder if you could give me your opinion. If Medicare 

totally provided prescription drugs, would your company stop providing them for retirees? 

Dr. Kerr. I think the option would probably be to look at a “wrap-around”, similar to what we do 

with Medicare. 

Chairman Johnson. What do you do with Medicare right now? 

Dr. Kerr. Medicare is primary, and our insurance acts as secondary, so we reimburse employees 

for the Part B premium that they pay. And for what is not covered by Medicare, they have access 

to our insurance up to the limit it covers. 

Chairman Johnson. In the bill that is being considered right now, there is a break in that coverage.

I think it is $2,000 to $4,500. That is not firm yet. Would your company help the retiree with 

paying for that so it wouldn't come out of their pocket then? 

Dr. Kerr. I suspect we would, and that there would be a plan that might involve some cost sharing 

with that percentage. But I doubt that we would abandon the coverage entirely. 

Chairman Johnson. Okay, I am glad to hear that. Thank you. 

 I have a question here for Mr. Schieber. You mentioned “regulatory schizophrenia” has 

made it difficult for employers to secure retiree health benefits. If you had the opportunity to prefund, how would the health situation be different? 

Mr. Schieber. Well, part of the problem here is that the rights to these benefits are earned in one 

period and the actual paying for them is going on in a different period. If a worker's productivity 
14

can be partially tapped at the time they are working to help finance the benefit down the road, you 

can actually put an asset against the liability. And if that asset is there, it will make the benefit far 

more secure than when you are depending on the company at some point in the future having the 

ability to pay a promise that was earned many, many years ago. It simply would provide a security 

that does not now exist. 

 Now, in some cases it might actually lead to the elimination of benefits on a going-forward 

basis, because some employers with their employees might conclude that they couldn't afford to 

fund these benefits. But if you can't afford to fund a benefit sometime in the future, you really 

ought not to be promising it to people. At least that is my opinion. 

Chairman Johnson. Maybe we ought to fix Social Security that way. 

Mr. Andrews. We ought to do something with it. We should stop spending money on the budget. 

Chairman Johnson. Yes, I know it. 

Mr. Mittelstaedt, you mentioned that because of FAS 106 managers recognized that firms 

couldn't afford the present benefit levels. If the managers had understood the magnitude of liability 

for health benefits, do you think they would have changed the way the early labor contracts were 

negotiated or written? 

Mr. Mittelstaedt. Yes, I do. When a lot of the promises were made, I don't think that the valuation 

techniques were there to actually even know what they were promising. And I am not sure that 

they could have foreseen how expensive costs would be 20 and 30 years later. So even if they had 

had to book a liability, I am not sure that the liability would have been high enough. 

 But following up with what Syl said, I think if firms would have had to expense something 

for the future benefits early on, they may not have promised the benefits originally. What they 

were doing is promising these benefits. They had to expense a very small portion of the promise. 

They only had to expense the amount actually paid to retirees in that year. So I think in some ways 

they promised things without really thinking about the ramifications later on. 

Chairman Johnson. Thank you, sir. I won't ask any questions of the CWA, but I enjoy eating 

hamburgers with them in Plano. 

 I will recognize Mr. Andrews. 

Mr. Andrews. Thank you, Mr. Chairman. Dr. Kerr, in your testimony, you talk about the 

company incurring $1.6 billion in healthcare costs for retirees. Did I read that number correct, $1.6 

out of $2.5 billion? 

Dr. Kerr. Yes. 
15

Mr. Andrews. And the $550 million number that you refer to for pharmaceuticals is that just for 

retirees or is that for everybody? 

Dr. Kerr. No, that is for everybody. Of that, retirees consume about $380 million. 

Mr. Andrews. So if I understand this correctly, of the $1.6 billion the company spent last year on 

retiree healthcare costs, $380 million, or just below 25 percent of that, was on pharmaceuticals, 

prescriptions? 

Dr. Kerr. That is correct. 

Mr. Andrews. Okay. How much of a positive impact would it have on your company if we had a 

prescription drug benefit under Medicare? If that $380 million dropped to, say, $100 million a year 

in the “wrap-around” that you just described, how would you characterize the impact of that on 

your company's health plan? 

Dr. Kerr. It would be huge in terms of a financial impact, not only the direct dollars that we pay 

out each year, but as a component of our FAS 106 liability drugs are an increasing portion. 

Mr. Andrews. Now, one of the points that I want to make about this is there are a lot of proposals 

around here that are called Medicare prescription drug benefits, but not all of them would really do 

much to address the problem that we are talking about today. The President's proposal, for 

example, is rather severely means tested in a way that I would assume that most of the retirees who 

worked for companies that have retiree health benefits have incomes that would place them out of 

the program. If you have been fortunate enough to work for the companies that are on that list, you 

probably made enough money that you have a pension. And when that is added to your Social 

Security, you are out of the range that the President's plan would cover. So I think it is important to 

note for the record that if we are going to have a prescription drug benefit, it needs to be very broad 

in eligibility requirements. 

 If we had such a requirement, I would like to ask each of the panelists what impact you 

think it would have on the problem that we are talking about today? More precisely, do you think 

that a robust prescription drug benefit under Medicare would essentially solve the problem of the 

unfunded liabilities of retiree healthcare for employers? I would ask each of the panelists that. 

Mr. Schieber. It would certainly have an effect on the recorded liabilities on the balance sheet of 

these companies. One of the things I think we need to keep in mind is that if we are going to start 

adding benefits through Medicare, that there is going to be a cost that is incurred in the provision of 

that benefit, and the people that have to pay for that cost are going to be the workers and the 

employers through increases ultimately in the payroll tax. We can talk about the reductions of 

costs or liabilities at one point, but it doesn't mean that there are not offsetting costs and liabilities 

created somewhere else. 

Mr. Andrews. If I may, Mr. Schieber, one of the options would be an increase in the Medicare 

payroll tax. Another option is to subsidize the Medicare trust fund with other tax revenues from the 
16

government from the income tax and other taxes. The Medicare trust fund is not constitutionally 

mandated. 

Mr. Schieber. It is not constitutionally mandated, and I understand that. But a tax of any sort is 

going to impose a cost on the economy and the society. There is no zero-cost solution. I am not 

opposed to providing this kind of benefit. But as I said in my comments here before the 

Committee, we ought to want to maintain the benefits in our current retirement system. We are all 

trying to figure out how to get somebody else to pay the cost. 

Mr. Andrews. Or some of us believe that a scaling back of the tax cut that was enacted in 2001 

would provide that revenue. 

Ms. Novotny, what would your answer be? 

Ms. Novotny. I think I would provide some relief that our employers have been seeking. I guess I 

would say an alternative, if we don't have some relief like that, is that more retirees would be losing 

their benefits, because the cost would become intolerable. In the growth rate in our retiree health 

cost, 25 percent of that was due to prescription drugs. So we believe that that will have an 

immediate important impact and could help. 

Mr. Andrews. Thank you. Mr. Mittelstaedt? 

Mr. Mittelstaedt. I would agree that it would help. Anything Congress could do to slow down 

medical inflation would be helpful. But I think unless you add funding to that, it won't stop 

completely. All you are doing is reducing the liability. But I think you need to get some assets in 

there to provide more security to retirees. 

Mr. Andrews. I appreciate that. And I think, Dr. Kerr, you have already answered the question in 

your written testimony that you would favor such a plan. 

Dr. Kerr. We would. 

Mr. Andrews. Thank you. 

Chairman Johnson. For the record, I would just like to point out that prescription drugs are 

becoming more and more expensive. We find in the healthcare system that some of the doctors 

provide prescription drugs and sometimes they are the kind of drugs that a person has to take for 

life, which get to be pretty expensive. I suppose you have run into that at Ford already? 

Dr. Kerr. Yes, in the retiree population if you look at drug usage, it is mostly in that area, 

cardiovascular, arthritis, drugs that you are going to take for chronic disease. 

Chairman Johnson. And even generics are not that cheap anymore. 

Dr. Kerr. They are cheaper than brand. 
17

Chairman Johnson. I think the average cost is somewhere between 10 or 15 percent a year 

increase, and even from the government side we can't fund that kind of increase. 

 I recognize Mr. DeMint. 

Mr. DeMint. Thank you, Mr. Chairman. I apologize for being late, and while I didn't hear a lot of 

the testimony, I have had a chance to review it, at least on paper.

I think the undercurrent I sense is that the future of defined benefit healthcare plans that are 

not pre-funded is kind of grim. And some of you may want to straighten me out if I didn't get that 

correctly from your testimony. The concept of employers pre-funding their plans is interesting, but 

also the idea of employees creating healthcare savings is also very appealing to me. This not only 

gives more security but it allows the employees themselves to shop and pay for their normal 

healthcare, at the same time allowing employers the opportunity to provide catastrophic coverage.

The thought of employees arriving at retirement with some healthcare savings and giving Medicare 

an option to supplement those savings with another catastrophic overlay is interesting to me. 

 Dr. Kerr, I will direct my question to you as an employer but I would like some other 

opinions, too. What if you could offer a catastrophic level health plan for your active employees as 

well as retirees, and make pre-tax contributions to an employee health savings plan, or 401(k) for 

healthcare, and the employees themselves could roll over that money and accumulate it over a 

period of time? Has this type of plan been discussed where the employee would actually benefit 

from contributions from the employer as well as perhaps their own contributions to accumulate 

some healthcare savings that they could take to retirement? Has that been discussed, and is that of 

any interest to the Ford Company? 

Dr. Kerr. It is early in the discussions of that type of plan. Some of the interest is in the form of 

questions that surface early on such as what would be the ultimate responsibility of the employee, 

what would the magnitude of that be, and how would it impact the current benefit coverage they 

have? These are issues that are very thorny but would need to be worked through to have that kind 

of plan accepted. 

Mr. DeMint. Mr. Schieber, do you have some comments on that? 

Mr. Schieber. Some employers are already beginning to create the equivalent of an individual 

account. It is more a notional account than a real account because of the funding issues that they 

face. But a theoretical contribution is made to this account for each year of service that the worker 

is employed, and then some additional interest is credited to that account. The account can then be 

used during retirement to help pay the premiums or the costs associated with utilizing healthcare. 

Some of it is going on already in spite of the hurdles that employers are facing. I think it is 

certainly a potential option that many more would look at if there were the possibility of creating 

real accounts and letting workers truly accumulate an asset. 

Mr. DeMint. And I want to clarify that I am not talking about employers dropping insurance but 

perhaps raising the level and helping the employee to have the money necessary to do the 
18

shopping.

Mr. Schieber. And I agree. I think that is vital. 

Mr. DeMint. I believe another benefit of that type of plan, instead of mandating that employers 

cover every malady, whether it be mental health, diabetes, whatever, is that there would be money 

available for the employee to make choices based on their own need, again within the safety net 

coverage that could be provided while working as well as in retirement. 

 Any other comments on what I think are variations on a defined contribution plan? Dr. 

Kerr? 

Dr. Kerr. We actually have begun to employ that for new salaried hires looking forward to their 

retirement. If you join Ford Motor Company after June 1, 2001 a year ago, the benefit that is 

provided currently is a window of time to begin to accumulate that asset. You know when you 

come in that that is an expectation; as opposed to having it imposed in short order before 

retirement. In retirement, the commitment for the employee and for the dependents that they may 

have is limited by percentage. That change in benefit is actually in place. 

Mr. DeMint. That is good. 

 Yes, sir? 

Mr. Mittelstaedt. I would just add that some things that I have read state that some employers 

would like to do more defined contributions style plans, but from what I understand it is unclear 

exactly how the employees would be taxed unless they are very careful with the design of that plan.

So it should be made clearer about what happens. 

 The other thing that I would add is I think any program has to include more education for 

employees about retirement planning. And part of this goes back to what Mr. Andrews said earlier.

People in the steel industry made a lot of money, cash wage. But now at the time when they are 

retiring, they don't have any money for retirement. Now I think with some education, they could 

have saved more on their own for the possibility that steel may not have had the money to pay. 

Mr. DeMint. Thank you. I think I am out of time. 

Chairman Johnson. The gentleman's time has expired. 

I recognize the gentleman from Massachusetts, Mr. Tierney. 

Mr. Tierney. Thank you, Mr. Chairman. Let me ask the members of the panel, first of all, when 

the Financial Accounting Standards Board concluded its statement for 106, one of its statements 

was that “post-retirement benefits are not gratuities but are part of an employee's compensation for 

services rendered. Since payment is deferred, the benefits are a type of deferred compensation.” 
19

 Are we all in agreement on that? 

Ms. Novotny. It is a real benefit. 

Mr. Schieber. If you are going to operate this plan on an ongoing basis, certainly that is correct. 

Mr. Tierney. Well, we have been doing it on an ongoing basis, have we not? 

Mr. Schieber. Well, some companies haven't, because it is not a contractual obligation. 

Mr. Tierney. Let me narrow it down. With respect to those companies that have, a great number 

of them have now decided that they are either going to reduce the coverage or eliminate the 

coverage for people. And my question to you is in those instances where this is in essence a form 

of deferred compensation, people have earned this, and now they retire and they find the landscape 

changing on them, why should that employee, or more likely if they can't do it, the taxpayer, start 

assuming the burden that the company had willingly obligated itself as a matter long ago? 

Mr. Schieber. Your question is why should the taxpayers assume that obligation? 

Mr. Tierney. Well, the employee but ultimately a lot of these employees can't, so they end up 

needing help. 

Mr. Schieber. Well, the problem is the nature of the tax law. 

Mr. Tierney. I am not even talking taxes here. I am talking a company has a deferred 

compensation here. They have agreed to pay these people in the form of deferred compensation by 

way of health benefits. Now, they want to break that promise. So now they are turning around, 

they are reducing their coverage or they are eliminating it, which means either that employee has to 

go out and get coverage or they have to go for some sort of government assistance. Explain to me if 

you would the legal or moral case in that matter? 

Mr. Schieber. The economic reality is that it is not deferred compensation, because part of their 

compensation has not been laid away to be paid to them later. 

Mr. Tierney. Well, that is the company's choice if they didn't do that, right? 

Mr. Schieber. No, they are effectively precluded under the tax law from laying that away. 

Mr. Tierney. The tax law says you cannot put money aside for a rainy day? 

Mr. Schieber. If you put that money aside, you do not get a tax deduction and you pay a special 

business tax on what you accumulate. 

Mr. Tierney. But this is the deal they made, isn't it? 
20

Mr. Schieber. The problem is that the people that are now being called upon to fill that deal are 

not the same people that made the deal. 

Mr. Tierney. Even though they are in the same company. 

Mr. Schieber. No, they are not necessarily in the same company. 

Mr. Tierney. Oh, a succeeding company, whatever. 

Mr. Schieber. But let's look at the case of the steel industry, which is part of the reason this has all 

come to a head. 

Mr. Tierney. Excuse me a second, I have only got a limited time here, so let me choose the 

examples we use. Let's not use the steel industry, let's use one of the other companies that have 

decided to eliminate their coverage, or that have changed the terms of it. The company plan not the 

steel industry but another company, like a Sears or somebody like that. 

Mr. Schieber. Which has faced its own tremendous competitive pressures and its own 

reorganization requirements because of what has been imposed upon it in the marketplace. 

Mr. Tierney. So the free market didn't work in their favor with respect to this and now they want 

to push it off onto others, is that what you are telling me? 

Mr. Schieber. What I am saying is that you cannot expect someone today to make a commitment 

that a totally different group of people will necessarily fulfill 20 or 30 years down the road. 

Mr. Tierney. Well, wait a minute; we are talking about corporations here. So technically we are 

talking about the same person. This corporation, this company had made a promise to these 

people, and nothing has changed. 

Mr. Schieber. As I said in my testimony, if you look at the 1972 Fortune 50 list, there are only 21 

left today as freestanding entities. All of the rest of them have either gone out of business, they 

have been assumed by some other entity, several of them have gone bankrupt. Some of them are 

right now in their second bankruptcy since 1972. 

Mr. Tierney. With respect to companies that aren't in bankruptcy, companies that are still 

profitable, many of those companies are still reducing their retiree health coverage or eliminating it. 

What is the case morally or legally for them to be walking away from that obligation? 

Mr. Schieber. It is an extremely regrettable circumstance. 

Mr. Tierney. All right, let me move on. Does anybody else agree with the regrettable 

circumstances of companies that walk away from their moral obligation? 

Mr. Mittelstaedt. May I answer that? 
21

Mr. Tierney. Well, first Ms. Novotny, she was next. 

Ms. Novotny. Thank you. I guess I am not quite tracking with your concern. What I see with the 

employers that we have negotiated with are employers that were playing by the rules when they 

made the promise and then the rules changed on them. And we negotiated under those same rules 

and struggled then to figure out how to maintain the promise in spite of the change of the rules.

And I think that I have to commend both the unions and the companies with whom we bargain over 

trying to maintain this important benefit and recognizing the importance of it to the retirees on an 

individual basis. 

Mr. Tierney. But, Ms. Novotny, there are some unions that weren't even allowed to negotiate for 

health benefits or have the legal authority to uphold, bargain for agreements for this. There are 

some court cases that allow the companies to walk away from their responsibilities, even though 

the union's case was that they had bargained for the continuation of these benefits in good faith. So

not everybody is represented by the union and not everybody has been lucky enough to maintain 

them. 

Ms. Novotny. Absolutely. But then I would say that is the help that is required. Once the rules 

changed about how companies could pay for it and the impact that payment would have on their 

balance statements, then we do need some help in figuring out a new landscape. 

Mr. Tierney. Well, not just help for a landscape. These companies are looking to shift the burden, 

right?

Ms. Novotny. Well, is that the question then? There is the large question about the right to 

healthcare, I suppose, and some of us are saying that that is a right and we should help figure these 

burdens out, how to ease these burdens. 

Mr. Tierney. Thank you. 

Chairman Johnson. Mr. Mittelstaedt, do you want to respond to that question? 

Mr. Mittelstaedt. Just briefly.

From a legal standpoint, most of the firms that are changing these plans had terms in their 

agreement that said that they had the right to modify. So this is a strange type of contract that says 

we can change it at any time. 

Mr. Tierney. That is why I phrased it as both moral and legal. They have walked away and found 

the right to amend their contracts or to eliminate them. The problem is there are still a number of 

people who got deferred compensation promised to them that now aren't getting it. And the 

companies are saying we are not going to live up to that obligation. Take your choice, the 

employee, or if they can't afford it, the taxpayers. But it is another case of shifting responsibilities 

from corporations and companies onto individuals like we have with the 401(k) that I am fearful to 

hear my colleague suggesting that they want to do to healthcare benefits the same thing they did 

with retirement benefits, because all the research on that indicates that the 401(k) has not improved 
22

people's retirement situation appreciably. And I think that is what you are going to find out in this 

instance. 

Mr. Mittelstaedt. Well, I think from a moral standpoint, though, you have got these trade-offs 

between the current workers and retirees staying in business versus not staying in business. And if 

the choice is driving a firm into bankruptcy because you don't cut these benefits, then I am not sure 

that is the best solution, either. 

Mr. Tierney. But when the choice is not that, when you have a profitable corporation that does this 

to move the bottom line that is where the moral question comes in. 

Mr. Mittelstaedt. I think it is a continuum. It is not that easy, bankrupt, not bankrupt. It is do we 

stay on this track or we do go into bankruptcy. 

Mr. Tierney. This is where it is pretty clear. 

Chairman Johnson. I think we can all agree that employers who are offering retiree health 

benefits are doing the right thing and ought to be commended. 

Mr. Tierney. What about the ones that are discontinuing, what would you say about them, Mr. 

Chairman? 

Chairman Johnson. This hearing is intended to investigate the reasons why employers are finding 

it difficult to continue offering retiree health benefits. 

Mr. Tierney. Always enlightening. 

Chairman Johnson. I think our best approach, and you probably agree with me, Mr. Tierney, is to 

work together as a Committee to find ways to make it easier for employers to offer those benefits 

and make sure that employees have the resources they need after they retire. 

Mr. Tierney. Well, I guess the question is, again, with respect to this, is it the taxpayers' resources 

that we are going to be going into, or are there other resources for people that are profitable? 

Chairman Johnson. No, but there are tax benefits that can be given to companies that they are not 

now getting. Also some of the laws and regulations that are on the books are causing them 

problems, too. As far as health benefits are concerned, the President is trying to focus on those who 

have nothing so that we can take care of them first. 

 Sir? 

Mr. Tierney. Compassionate as always. 

Chairman Johnson. That is right. 
23

Mr. Tierney. I got a new bridge to sell you. 

Chairman Johnson. The Chair recognizes Mr. Tiberi. 

Mr. Tiberi. Thank you, Mr. Chairman. 

Mr. Schieber, you were beginning to answer Mr. Tierney's question regarding steel workers 

and you weren't able to finish part of that answer. I just was curious as to how you were going to 

answer that. 

Mr. Schieber. Well, the fact of the matter is that these commitments were made at a point in time 

where the management in the steel firms could not have begun to understand the evolution of the 

economy and the environment they were going to be working in. I think they committed 

themselves to providing these benefits in good faith, but the environment has changed, and now 

they are facing the prospect in some cases that these liabilities, these obligations, actually do mean 

bankruptcy. And it is not clear to me that this straightforward moral case is so easily made. It is 

regrettable. 

 Now, when they made the promise and when people were actually accruing the benefit, if a 

portion of compensation had actually been put away, actually truly been deferred, there would be 

resources here to pay for these people's healthcare right now and these companies could go about 

doing their business in the very competitive environment they are in. And the obligations would 

not necessarily bankrupt them and put all their current workers out of a job. 

Mr. Tiberi. In your written testimony, you suggest that giving consumers the ability to have some 

financial stake in their choices would stem the rapid growth of healthcare costs. Can you give 

some examples to that? 

Mr. Schieber. Well, first of all, let me draw an analogy. Today when we go to the grocery store, if 

the price of steak is rising, at some juncture we start buying chicken instead of steak. Now, we 

have got a lot of options in our healthcare sector that people aren't provided with; the opportunity to 

look at buying chicken instead of buying steak. And what we have done in many cases is we have 

put a fee on getting into the grocery store. We have raised the premiums for these plans but not 

given people any sensitivity to what it is they are actually consuming. 

 I think if we went to more of a catastrophic health insurance program, where people paid 

for the first part of their consumption, then they would be making some price-sensitive decisions.

And they probably would not buy some of the things they now buy. 

 I don't know if any of you watch the evening national news. But on all these stations, we 

are hearing one advertisement after another for the next new drug that is out. And in about half of 

these advertisements, they don't even tell us what the drug is for. You watch the Nexium 

commercials. They don't even tell us what it is for. You are supposed to go ask your doctor to 

prescribe Nexium. 
24

 Well, we have set up a situation where people are not at all sensitive about what it is they 

need and what these things cost. And I think we need to put some of that sensitivity into the 

system. 

Mr. Tiberi. Dr. Kerr, you suggest that unfunded or unlimited liability, as well as mandating 

healthcare benefits, adversely impacts retirees' healthcare before anyone else's. Why is that? 

Dr. Kerr. The comments were specifically addressed to retiree health. And to the extent that there 

are mandates and obligations, you deprive both the employees and the employer of the flexibility to 

adapt to a changing market and changing circumstances. And I say both because we have seen 

both in markets where Medicare plus choice has eroded or where employees want the choice of 

having a managed care plan and are willing to make concessions in terms of increased co-pays or 

contributions to maintain the plan to make it viable. If you mandate a prescriptive set of benefits, 

coverage, or even the financing mechanism you remove that flexibility. 

Mr. Tiberi. Thank you. 

Mr. Chairman, I yield back. 

Chairman Johnson. The Chair recognizes Mr. Wilson from South Carolina. 

Mr. Wilson. Thank you, Mr. Chairman. Professor Mittelstaedt, a comment was made a minute 

ago that 401(k)'s didn't seem to be very significant, but I was only elected in December so I have 

come here from the private sector, a medium-sized real estate law firm. And 401(k)'s were 

phenomenally important with persons that I associated with. From your background, what do you 

feel? I know it doesn't directly relate, but aren't 401(k)'s very significant to the American 

prospective retiree? 

Mr. Mittelstaedt. I think the concern with 401(k)'s is that not everyone participates in them, 

especially lower-paid workers, and so the concern is that you don't have the coverage that you 

would get under a traditional plan, either a defined benefit plan or a money purchase defined 

contribution plan. The other issue is that in a 401(k) plan the employee is bearing the investment 

risk instead of the firm. So I think those are the issues with the 401(k)'s. 

Mr. Wilson. Well, they certainly aren't widely participated in and I believe they have trillions of 

dollars of assets? 

Mr. Mittelstaedt. Yes, I would say that they aren’t. I would say that they are decent retiree benefit 

plans or they are decent pension plans. They just aren't as good from an employee standpoint or 

may not be as good from an employee standpoint as a money purchase defined contribution plan or 

defined benefit plan. So, again, it is a kind of continuum thing; it is better than no retirement. 

Mr. Wilson. But is it particularly helpful for small business? 

Mr. Mittelstaedt. Yes. 
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Mr. Wilson. Mr. Kerr, you mentioned that the domestic auto industry is facing an extremely 

competitive international market. How do retiree medical costs impact American auto companies? 

And are your international competitors grappling with these issues as well? 

Dr. Kerr. I will start with the second part of your question first, and the answer is international 

competitors are not grappling with those same issues by nature of the companies in which they 

operate and the retirement systems which their employees benefit from as a result. If you look at 

our retiree costs and try to append that to each automobile sold, it accounts for about $400 of the 

price in an automobile versus a competitor. 

Mr. Wilson. In fact, in our state we have been very successful with BMW. And actually we were 

competitive with Germany because we did have a more flexible retirement system and healthcare 

system. And so I think we do all that we can to make it competitive so that we can continue to 

compete and bring phenomenal investments to our states. 

 I have no further questions, Mr. Chairman. 

Chairman Johnson. Mr. Schieber, did you have a comment you wanted to make? 

Mr. Schieber. I would like to respond to this issue on 401(k)'s. 

Chairman Johnson. Okay, good. 

Mr. Schieber. There are three professors, Steven Venti at Dartmouth, David Wise at Harvard, and 

James Poterba at MIT, who have recently written a paper that you can get from the National 

Bureau of Economic Research. It is on their website. They have looked at the evolution of the 

401(k) system. Where these plans are offered, about 70 to 80 percent of workers take them up. 

The average contribution going into them today is between 8 and 9 percent of pay. Their 

projection, given the evolution of this system, is that by 2030 the 401(k) system will be paying out 

more in retirement benefits than our Social Security system as constructed under current law. By 

that time, our Social Security benefits will be costing between 15 and 16 percent of payroll. 

 So here will be a system at the half-life of Social Security that will be paying out as much 

as Social Security on a totally voluntary basis. Not one person has been coerced to put a dime in 

the 401(k) system. Now this contrived notion that these are not valuable retirement benefits is 

really a falsification of what is going on, and the public shouldn't stand for it. 

Chairman Johnson. Yes, the only problem with 401(k)'s is the government cannot guarantee the 

stock market. You know that. 

Mr. Schieber. There is no doubt about that. These are not absolutely perfect. But they are a 

dickens of a lot better than nothing. 

Chairman Johnson. No kidding, you are right. 
26

Mr. Andrews. I just wanted to ask the panelists if they would consider submitting a written answer 

to this question, because we need to get to the floor for welfare reform. I am interested in the views 

of the panelists on a proposal that would permit employers to take pre-funded healthcare costs for 

retirees, place them into an actual trust fund so the money would be dedicated to healthcare for 

retirees, could not be used for anything else and could be preserved from bankruptcy and what have 

you. And then making that fully tax deductible as compensation. I would be interested in what the 

panelists would think about that as an idea. 

Mr. Schieber. That is what I support in my testimony. 

Chairman Johnson. Yes, sir. This has really been an expert panel, and I thank you all for being 

here.

Mr. Wilson, you were finished, were you not? 

Mr. Wilson. Yes, sir. 

Chairman Johnson. Thank you. 

Mr. Wilson. Thank you, Mr. Chairman. 

Chairman Johnson. We appreciate you all being here, and I thank the witnesses for their valuable 

time and testimony and the Members for participating. And if there is no further business, then the 

Committee stands adjourned. 

Whereupon, at 12:04 p.m., the Subcommittee was adjourned. 
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Table of Indexes 

Chairman Johnson, 1, 4, 5, 7, 9, 11, 13, 14, 16, 17, 18, 21, 22, 23, 24, 25, 26 

Dr. Kerr, 11, 13, 14, 15, 16, 17, 18, 24, 25 

Mr. Andrews, 3, 4, 14, 15, 16, 26 

Mr. DeMint, 17, 18 

Mr. Mittelstaedt, 14, 16, 18, 20, 21, 22, 24 

Mr. Schieber, 13, 15, 16, 17, 18, 19, 20, 23, 25, 26 

Mr. Tiberi, 23, 24 

Mr. Tierney, 18, 19, 20, 21, 22, 23 

Mr. Wilson, 24, 25, 26 

Ms. Novotny, 7, 16, 19, 21