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The Tarnished Parachute

By Myron D. Rumeld and Jeremy M. Mittman
May 30, 2006

As American companies struggle to compete in a global market, they are increasingly considering the merits of eliminating or reducing costly retiree benefits. For many companies, the costs of these benefits have become staggering. For example, before recently announcing plans to freeze health benefits for tens of thousands of its white-collar retirees, Ford Motor Co. was facing health-care expenses of more than $3.5 billion. Its rival, General Motors, which according to recent reports owes a projected $89 billion in welfare and pension benefits to its current and future retirees, just announced that it will offer workers with 10 years' experience a payment of $140,000 and a pension, if in return these workers will leave their employment and forgo health care benefits.

These large retiree benefit obligations date back to times when, in an effort to attract employees who would remain with them for their entire careers, and sometimes in order to maintain labor peace, companies promised 'cradle-to-grave' benefits that would enable these employees to live comfortably in retirement. Today, however, these same companies face increased competitive pressures from both start-up companies, which typically do not offer retiree health benefits to their younger workforce, and companies located in foreign countries like Japan, which assumes responsibility for retiree benefits.

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