[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                  SAFEGUARDING RETIREE HEALTH BENEFITS

=======================================================================



                                HEARING

                               before the

                              COMMITTEE ON
                          EDUCATION AND LABOR

                     U.S. House of Representatives

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, SEPTEMBER 25, 2008

                               __________

                           Serial No. 110-112

                               __________

      Printed for the use of the Committee on Education and Labor


                       Available on the Internet:
      http://www.gpoaccess.gov/congress/house/education/index.html



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                    COMMITTEE ON EDUCATION AND LABOR

                  GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice       Howard P. ``Buck'' McKeon, 
    Chairman                             California,
Donald M. Payne, New Jersey            Senior Republican Member
Robert E. Andrews, New Jersey        Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia  Peter Hoekstra, Michigan
Lynn C. Woolsey, California          Michael N. Castle, Delaware
Ruben Hinojosa, Texas                Mark E. Souder, Indiana
Carolyn McCarthy, New York           Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts       Judy Biggert, Illinois
Dennis J. Kucinich, Ohio             Todd Russell Platts, Pennsylvania
David Wu, Oregon                     Ric Keller, Florida
Rush D. Holt, New Jersey             Joe Wilson, South Carolina
Susan A. Davis, California           John Kline, Minnesota
Danny K. Davis, Illinois             Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona            Kenny Marchant, Texas
Timothy H. Bishop, New York          Tom Price, Georgia
Linda T. Sanchez, California         Luis G. Fortuno, Puerto Rico
John P. Sarbanes, Maryland           Charles W. Boustany, Jr., 
Joe Sestak, Pennsylvania                 Louisiana
David Loebsack, Iowa                 Virginia Foxx, North Carolina
Mazie Hirono, Hawaii                 John R. ``Randy'' Kuhl, Jr., New 
Jason Altmire, Pennsylvania              York
John A. Yarmuth, Kentucky            Rob Bishop, Utah
Phil Hare, Illinois                  David Davis, Tennessee
Yvette D. Clarke, New York           Timothy Walberg, Michigan
Joe Courtney, Connecticut            [Vacancy]
Carol Shea-Porter, New Hampshire

                     Mark Zuckerman, Staff Director
                Sally Stroup, Republican Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on September 25, 2008...............................     1

Statement of Members:
    Altmire, Hon. Jason, a Representative in Congress from the 
      State of Pennsylvania, prepared statement of...............    69
    Kline, Hon. John, Ranking Republican Member, Subcommittee on 
      Health, Employment, Labor, and Pensions....................     3
        Prepared statement of....................................     4
        Additional submissions:
            Statement of James A. Klein..........................    66
            Statement of the U.S. Chamber of Commerce............    67
    Shea-Porter, Hon. Carol, a Representative in Congress from 
      the State of New Hampshire, prepared statement of..........    69
    Tierney, Hon. John F., a Representative in Congress from the 
      State of Massachusetts.....................................     1
        Prepared statement of....................................     2
        Statement of William Gabbard, the Flex Retirees 
          Organization (FRO).....................................    59

Statement of Witnesses:
    Jones, C. William, ProtectSeniors.Org........................    13
        Prepared statement of....................................    14
    Kadereit, Bill, president, National Retiree Legislative 
      Network....................................................     8
        Prepared statement of....................................    10
        Additional submissions:
            Letter, dated September 29, 2008.....................    12
            White paper, ``Safeguarding Retiree Health Care 
              Benefits: Protecting Retirees From Fixed-Income 
              Erosion'' Internet address.........................    13
    Lillie, David E., Raytheon Missile Systems retiree...........     5
        Prepared statement of....................................     7
    Macey, Scott J., senior vice president, government affairs, 
      Aon Consulting, on behalf of the ERISA Industry Committee..    31
        Prepared statement of....................................    33
        Responses to questions for the record....................    60
    Stein, Norman P., professor, University of Alabama School of 
      Law........................................................    35
        Prepared statement of....................................    37
    Yamamoto, Dale H., president, Red Quill Consulting, Inc......    19
        Prepared statement of....................................    20


                  SAFEGUARDING RETIREE HEALTH BENEFITS

                              ----------                              


                      Thursday, September 25, 2008

                     U.S. House of Representatives

                    Committee on Education and Labor

                             Washington, DC

                              ----------                              

    The committee met, pursuant to call, at 10:13 a.m., in room 
2175, Rayburn House Office Building, Hon. John Tierney 
presiding.
    Present: Representatives Tierney, Kildee, Andrews, Woolsey, 
Hinojosa, McCarthy, Kucinich, Wu, Holt, Davis of California, 
Bishop of New York, Sarbanes, Hirono, Altmire, Hare, Courtney, 
Shea-Porter, Kline, Platts, and Wilson.
    Staff Present: Aaron Albright, Press Secretary; Tylease 
Alli, Hearing Clerk; Jody Calemine, Labor Policy Deputy 
Director; Lynn Dondis, Senior Policy Advisor, Subcommittee on 
Workforce Protections; Carlos Fenwick, Policy Advisor, 
Subcommittee on Health, Employment, Labor and Pensions; Brian 
Kennedy, General Counsel; Therese Leung, Labor Policy Advisor; 
Sara Lonardo, Junior Legislative Associate, Labor; Ricardo 
Martinez, Policy Advisor, Subcommittee on Higher Education, 
Lifelong Learning and Competitiveness; Kevin McDermott, 
Legislative Director, Congressman Tierney; Alex Nock, Deputy 
Staff Director; Joe Novotny, Chief Clerk; Megan O'Reilly, Labor 
Policy Advisor; Meredith Regine, Junior Legislative Associate, 
Labor; Michele Varnhagen, Labor Policy Director; Mark 
Zuckerman, Staff Director; Robert Borden, Minority General 
Counsel; Cameron Coursen, Minority Assistant Communications 
Director; Ed Gilroy, Minority Director of Workforce Policy; Rob 
Gregg, Minority Senior Legislative Assistant; Alexa Marrero, 
Minority Communications Director; Jim Paretti, Minority 
Workforce Policy Counsel; Chris Perry, Minority Legislative 
Assistant; Molly McLaughlin Salmi, Minority Deputy Director of 
Workforce Policy; Ken Serafin, Minority Professional Staff 
Member; Linda Stevens, Minority Chief Clerk/Assistant to the 
General Counsel; and Loren Sweatt, Minority Professional Staff 
Member.
    Mr. Tierney. Good morning. I thank all witness and my 
colleagues for their patience. As you know, we have got a lot 
of things going on at one time here and they are all important. 
So the quorum is present and the committee will come to order.
    I am just going to make a brief opening statement and give 
Mr. Kline an opportunity to do the same, and then we will hear 
from our witness and have some questions back and forth after 
that.
    Through the years, millions of workers have retired 
believing that they would be provided with the health care 
benefits that they were promised by their employer. These are 
benefits that they earned. What many of those workers found was 
that their former employer eventually made a cost-cutting 
decision to renege on that promise and cut or reduce those 
health care benefits. As a result, some retirees may have been 
forced to endure a drastic decline in the standard of living in 
order to pay for the out-of-pocket health care costs. Others 
may have been unable to obtain new coverage because of a 
preexisting condition and many may have opted to go without 
health care coverage because of its cost, taking a gamble and 
hoping to get by until they became Medicare-eligible.
    I am grateful to be chairing this meeting today. I 
requested the hearing and like many of my colleagues, I think 
retirees deserve a better deal. Hard work should not be 
rewarded with tough times and fairness has to be restored.
    Unlike pension plans, the Employee Retiree Income Security 
Act of 1974, popularly known as ERISA, does not impose 
mandatory ``vesting'' requirements with respect to health 
benefits. Consequently, many courts have upheld that there is 
no legal protection for employees. I have authored legislation 
H.R. 1322 to remedy this and ensure that the reasonable health 
care benefit expectations of retirees from ERISA-sponsored 
regulated group health plans are fulfilled. Other legislation 
has also been filed and will be part of this hearing.
    But specifically H.R. 1322 prohibits profitable plan 
sponsors from canceling or reducing promised retiree health 
benefits. It establishes an enforceable obligation to restore 
promised health benefits previously taken away from retirees 
and creates an ``Emergency Retiree Health Loan Guarantee 
Program'' to assist with the obligation to restore retiree 
health benefits. Spurring the need to enact this legislation is 
the fact that more and more workers are approaching retirement 
age. According to the Census Bureau, the number of individuals 
65 years or older is projected to increase by 73 percent by 
2025. The number of individuals between 55 and 64 years old is 
expected to grow by 36 percent. Today's hearing serves as an 
important opportunity to discuss how we can better safeguard 
retiree benefits. I look forward to hearing from all of the 
witnesses, and now I yield to the ranking member for his 
opening statement. Mr. Kline.
    [The statement of Mr. Tierney follows:]

    Prepared Statement of Hon. John F. Tierney, a Representative in 
                Congress From the State of Massachusetts

    Good morning.
    Through the years, millions of workers have retired believing that 
they would be provided with the health care benefits that they were 
promised by their employer, benefits that they earned.
    What many of those workers found was their former employer 
eventually made a cost-cutting decision to renege on that promise and 
cut or reduce those health care benefits.
    As a result, some retirees may have been forced to endure a drastic 
decline in their standard of living in order to pay for the out-of-
pocket health care costs. Others may have been unable to obtain new 
coverage because of a preexisting condition. And many may have opted to 
go without health care coverage because of its cost, taking a gamble 
and hoping to get by until they become Medicare-eligible.
    I requested and am grateful to chair today's Education and Labor 
Committee hearing because--like many of my colleagues--I believe our 
retirees deserve better; hard work should not be rewarded with tough 
times; fairness must be restored.
    Unlike pension plans, the Employee Retiree Income Security Act of 
1974--popularly known as ERISA--does not impose mandatory ``vesting'' 
requirements with respect to health benefits. Consequently, many courts 
have upheld that there is no legal protection for employees.
    I have authored legislation--H.R. 1322--to remedy this and ensure 
that the reasonable health benefit expectations of retirees from ERISA-
sponsored regulated group health plans are fulfilled.
    Specifically, H.R. 1322:
     Prohibits profitable plan sponsors from canceling or 
reducing promised retiree health benefits;
     Establishes an enforceable obligation to restore promised 
health benefits previously taken away from retirees;
     Creates an ``Emergency Retiree Health Loan Guarantee 
Program'' to assist with the obligation to restore retiree health 
benefits.
    Spurring the need to enact this legislation is the fact that more 
and more workers are approaching retirement age. According to the 
Census Bureau, the number of individuals 65 years or older is projected 
to increase by 73% by 2025. The number of individuals between 55 and 64 
years old is expected to grow by 36%.
    Today's hearing serves as an important opportunity to discuss how 
we can better safeguard retiree benefits, and I look forward to hearing 
from the witnesses.
    I now yield to the Ranking Member for his opening statement.
                                 ______
                                 
    Mr. Kline. Thank you, Mr. Chairman. Good morning to 
everybody. Thank you for participating in this morning's 
hearing on the critical issues affecting Americans who are 
retired or planning for retirement. And I find that as my hair 
gets whiter and whiter and thinner, that becomes ever more in 
front of my thoughts.
    As you know, our health care and retirement systems today 
are largely based on the voluntarily participation of 
employers. And this system certainly has some flaws, but for 
the most part, it has worked well in providing coverage and 
maintaining freedom from costly mandates. Rather than requiring 
employers to provide health care benefits, we have designed 
policies to encourage voluntary employer participation. These 
policies have succeeded in enabling employers to provide health 
care benefits to more than 160 million Americans including 
millions of retirees over the age of 55. These benefits are 
highly valued by employees, retirees, and their dependents, and 
companies recognize the value of maintaining generous benefits 
in order to attract talented workers and remain competitive in 
the global economy.
    Yet despite its many successes, as I said, the system is 
not without flaws. Yearly health care costs continue to 
increase at rates that dramatically outpace overall inflation. 
These cost increases are particularly problematic for retirees 
who may not be able to afford post-retirement health care 
benefits. Increasing health care costs also pose unique 
problems for private employers. Demographic trends indicate a 
large number of retirees in the coming years. When coupled with 
rising costs, this fact is forcing many employers to make 
difficult choices regarding the nature and extent of employee 
and retiree benefits. In some cases companies are forced to 
choose between continuing retiree benefits or creating new 
jobs.
    Today, we have the opportunity to learn more about the 
state of retiree health benefits and various proposals for 
reform. One proposal we have heard about would bar employers 
from reducing health benefits after the retirement of a worker. 
This is a deeply troubling proposal that threatens the very 
foundation of our voluntary employer-based system. Current law 
already prohibits employers from reducing or terminating 
promised benefits unless they expressly reserve the right to do 
so and fully disclose the intent under the ERISA benefit plan.
    The proposal in question would go much further, declaring 
that no changes could ever be made to benefits once a worker 
reaches retirement irrespective of unforeseen circumstances. 
The outcome of such an unprecedented and inflexible mandate is 
obvious. Employers will simply stop offering retiree health 
benefits, and this is clearly not the outcome that anyone 
desires. Rather than penalizing companies for trying to do the 
right thing, we should be exploring ways and I hope that we 
will be today to control the cost of health care benefits and 
encourage employers to continue voluntarily providing retiree 
benefits.
    As the current financial crisis makes clear, now is not the 
time to impose government coverage mandates that would serve to 
increase costs and reduce coverage. I am really looking forward 
to today to hearing from our distinguished witnesses and the 
discussion that will follow and I yield back.
    [The statement of Mr. Kline follows:]

   Prepared Statement of Hon. John Kline, Ranking Republican Member, 
        Subcommittee on Health, Employment, Labor, and Pensions

    Good morning. Thank you all for participating in this morning's 
hearing on the critical issues affecting Americans who are retired or 
planning for retirement.
    As you know, our health care and retirement systems are largely 
based on the voluntary participation of employers. While this system is 
not without flaws, it has--for the most part--worked well in providing 
coverage and maintaining freedom from costly mandates. Rather than 
requiring employers to provide health care benefits, we have designed 
policies to encourage voluntary employer participation. These policies 
have succeeded in enabling employers to provide health care benefits to 
more than 160 million Americans, including millions of retirees over 
the age of 55. These benefits are highly valued by employees, retirees, 
and their dependants--and companies recognize the value of maintaining 
generous benefits in order to attract talented workers and remain 
competitive in the global economy.
    Yet despite its many successes, the system is not without flaws. 
Yearly health care costs continue to increase at rates that 
dramatically outpace overall inflation. These cost increases are 
particularly problematic for retirees, who may not be able to afford 
post-retirement health care benefits.
    Increasing health care costs also pose unique problems for private 
employers. Demographic trends indicate a large number of retirees in 
the coming years. When coupled with rising costs, this fact is forcing 
many employers to make difficult choices regarding the nature and 
extent of employee and retiree benefits. In some cases, companies are 
forced to choose between continuing retiree benefits or creating new 
jobs.
    Today we have the opportunity to learn more about the state of 
retiree health benefits and various proposals for reform. One proposal 
we may hear about would bar employers from reducing health benefits 
after the retirement of a worker. This is a deeply troubling proposal 
that threatens the very foundation of our voluntary employer-based 
system.
    Current law already prohibits employers from reducing or 
terminating promised benefits unless they expressly reserve the right 
to do so and fully disclose this intent under their ERISA benefit plan. 
The proposal in question would go much further, declaring that no 
changes could ever be made to benefits once a worker reaches 
retirement, irrespective of unforeseen circumstances.
    The outcome of such an unprecedented and inflexible mandate is 
obvious--employers will simply stop offering retiree health benefits. 
This is clearly not the outcome anyone desires.
    Rather than penalizing companies for trying to do the right thing, 
we should be exploring ways to control the cost of health care benefits 
and encouraging employers to continue voluntarily providing retiree 
benefits. As the current financial crisis makes clear, now is not the 
time to impose government coverage mandates that would serve to 
increase costs and reduce coverage.
    I welcome our distinguished witnesses today, and I look forward to 
everyone's testimony.
                                 ______
                                 
    Mr. Tierney. Thank you, Mr. Kline.
    Without objection all members will have 5 days to submit 
additional materials for the hearing record. Now we will 
introduce our witnesses. I am going to give a brief 
introduction right across the panel and then we will start at 
the beginning with Mr. Lillie again.
    David E. Lillie, our first witness, was hired by the Hughes 
Aircraft Company in Tucson, Arizona, in 1973, which later 
became Raytheon Missile Systems. Mr. Lillie was a member of his 
union, Local 933 of the International Association of Machinists 
and Aerospace Workers. He retired from Raytheon in 1999 and was 
part of the class action lawsuit against Raytheon in 2004 after 
the company stopped paying retiree health premiums. Bill 
Kadereit--did I say that right, Mr. Kadereit.
    Mr. Kadereit. Yes.
    Mr. Tierney. He is the president of the National Retiree 
Legislative Network, which represents over 2 million retired 
workers from Fortune 500 companies. Mr. Kadereit retired from 
Alcatel Lucent in 1995 after 35 years of service.
    C. William Jones is the founder and chairman of 
Protectseniors.org, a nonprofit organization dedicated to 
saving corporate sponsored retiree health benefits. In 1996 he 
founded the Association of Belltell Retirees, Inc., an 
association dedicated to protecting retiree pensions and 
benefits.
    Dale Yamamoto is the founder and president of Red Quill 
Consulting, Inc. Mr. Yamamoto also worked for two major benefit 
consulting firms in Seattle, New York, and Chicago. He has also 
held positions as the corporate actuary for a Fortune 50 
company and is an actuary for two major insurance companies.
    Scott Macey is the senior vice president and director of 
government affairs of Aon Consulting, Inc. Mr. Macey is a 
former Chair of the ERISA Industry Committee and continues to 
serve as a member of the executive committee of that 
organization.
    And Norman Stein is the Douglas Arant professor of the 
University of Alabama School of Law where he teaches benefits 
and tax law.
    We are going to ask each of the witnesses to make a 
presentation for approximately 5 minutes. I think we will 
explain the lighting system to you, that little array of lights 
that come before you. The green is for the beginning of the 5 
minutes. When it comes to amber, you have 1 minute remaining. 
Red, Mr. Kline comes down and hits you with a hammer and that's 
the end on that. But when it gets to red we would like you to 
sum up and we will be as lenient as we can be, but members, I 
am sure, are anxious to ask questions on particular points of 
interest to them and we really want to hear what you have to 
say. So with that we appreciate your testimony and we will 
start with Mr. Lillie, please.

  STATEMENT OF DAVID LILLIE, RAYTHEON MISSILE SYSTEMS RETIREE

    Mr. Lillie. Good morning, Mr. Chairman, members of the 
Committee on Education and Labor. I want to thank you very, 
very much for giving me the opportunity to speak to you about 
the problems that retirees in Tucson, Arizona are having with 
Raytheon Missile Systems. As Mr. Tierney said, my name is Dave 
Lillie, and I worked with Hughes Aircraft since 1973. I was 
there when Raytheon came in and bought Hughes; so I retired 
from Raytheon Hughes in 1999. And I retired under the 1996 CBA, 
which is a contract for Hughes Raytheon, negotiated by my 
union, Local 933 of the International Association of Machinists 
and Aerospace Workers.
    In July of 2004, I received a notice in the mail that my 
company-paid medical insurance which I had since my retirement 
would now cost me $310 a month. Over the next 2 years, 2\1/2\ 
years, my premiums increased to $536 a month. This was a clear 
violation of the retiree health benefit language in the 1996 
collective bargaining agreement that was in effect when I 
retired. After meeting with Local 933's directing business 
agent, I soon learned that many retirees were paying as much as 
55 percent of their fixed retirement income just to pay these 
premiums they weren't supposed to have to pay.
    We held a meeting with all the Raytheon retirees that we 
could get in touch with who were affected by this violation. We 
retained legal counsel and found that Raytheon had unilaterally 
ignored the retiree health benefit language of the applicable 
collective bargain agreements. A class action lawsuit was filed 
against Raytheon to regain our company paid health benefits. 
The despicable action of Raytheon affected approximately a 
thousand retirees and their dependents who suffered not only 
monetary losses because of the unplanned premium costs, but 
also mental anguish and stress due to this unnecessary and 
drastic change in their lives. Many had to change to a 
different medical insurance plan sacrificing coverage for 
cheaper medical payments. Other retirees were forced to sell a 
large part of their retirement dreams in order to afford the 
premiums that they now have to pay.
    More than a few retirees have had to mortgage their homes 
that were paid off in order to pay medical expenses that were 
not covered under a cheaper insurance plan. This has happened 
to one of my friends who I worked with for many, many years. It 
has been terrible to witness what it is doing to him mentally 
as well as physically. Many have depleted their life savings to 
offset the premium costs. Quite a few planned to travel, visit 
their children, grandchildren, and great grandchildren or enjoy 
seeing friends and just traveling around the country.
    Now they just stay home or they go to Mexico to seek 
medical help. Retirees that could not afford even the cheaper 
plan have had to drop medical coverage altogether and simply 
pray to stay healthy. Sadly, one of my fellow retirees who 
could not afford the monthly premiums has incurred a 
significant out of pocket medical costs after his wife suffered 
two heart attacks requiring two pacemakers. She also developed 
pneumonia and diabetes which resulted in additional hospital 
stays. This sent their medical costs skyrocketing to over 
$87,000. All of this expense and no insurance, even though he 
was covered under a jointly negotiated collective bargaining 
agreement which provided health insurance until he and his wife 
both reached age 65. This summer our class action suit against 
Raytheon Missile Systems resulted in a favorable decision for 
Raytheon retirees.
    In his findings, District Judge David Bury said that the 
collective agreements ``unambiguously provide vested medical 
benefits for retirees until 65 at no cost.'' Judge Bury has 
ordered Raytheon to make the affected retirees whole and 
reinstate them in the company paid medical health insurance. 
Unfortunately, Raytheon has appealed this decision and the 
suffering for Raytheon retirees and their dependent continues.
    It is important to note that Raytheon is a company that has 
grown fat on government contracts. According to Raytheon's 2007 
annual report, 86 percent of company sales are to U.S. 
Government and all of the missile systems work is defense 
related. Since 2005 net income has tripled to nearly 2.6 
billion and earnings per share have doubled. It angers me to 
think that a corporation like Raytheon that shows contempt for 
the retirees that built the company now benefit so generously 
from my tax dollars.
    Mr. Tierney. Mr. Lillie, if I might without being rude, I 
have read the rest of the statement and I appreciate the 
sentiments that are in it, but I think you have substantively 
hit on the high points that you want to and if it is okay with 
you, we will move on to Mr. Kadereit and come back to 
questions. Does that work?
    Mr. Lillie. I guess.
    Mr. Tierney. Thank you very much.
    [The statement of Mr. Lillie follows:]

Prepared Statement of David E. Lillie, Raytheon Missile Systems Retiree

    Mr. Chairman and Members of the Committee on Education and Labor, I 
want to thank you very, very much for inviting me to speak to you about 
the problems the retirees are having with Raytheon Missile Systems in 
Tucson, Arizona.
    My name is Dave Lillie and in 1973 I went to work for Hughes 
Aircraft Company, which later became Raytheon Missile Systems. I worked 
as a tool and die maker until my retirement in 1999. As a retiree I was 
to receive fully paid medical insurance until age 65, a benefit that 
had been negotiated by my union, Local 933 of the International 
Association of Machinists and Aerospace Workers.
    Then, in July of 2004, I received a notice in the mail that my 
company paid medical insurance, which I had had since my retirement, 
would now cost me $309.77 a month. Over the next two and a half years 
my premiums increased to $535.71 per month, a clear violation of the 
retiree health benefit language in the 1996 collective bargaining 
agreement, which was the labor agreement that I retired under.
    After meeting with Local 933's Directing Business Representative, I 
soon learned that many retirees were paying as much as 55 percent of 
their fixed retirement income on these insurance premiums. We held a 
meeting with all the Raytheon retirees we could get in touch with who 
were affected by this violation. We retained legal counsel and found 
that Raytheon had unilaterally ignored the retiree health benefit 
language of the applicable collective bargaining agreements. A class 
action lawsuit was filed against Raytheon to regain our company paid 
health benefits.
    The despicable actions of Raytheon affected approximately 1,000 
retirees and their dependents, who suffered not only monetary losses 
because of unplanned premium costs, but also the mental anguish and 
stress due to this unnecessary and drastic change in their lives. Many 
had to change to a different medical insurance plan, sacrificing 
coverage for cheaper monthly premiums.
    Other retirees have been forced to sell a large part of their 
retirement dreams in order to afford the premiums they now have to pay. 
More than a few retirees have had to mortgage their homes that were 
paid off in order to pay medical expenses that were not covered under a 
cheaper insurance plan. This has happened to one of my friends who I 
worked with for many years. It has been terrible to witness what it is 
doing to him mentally, well as physically. Many have depleted their 
life savings to offset the premium cost. Quite a few planned to travel, 
visit their children, grandchildren, or great-grandchildren, or enjoy 
seeing friends and just traveling about this country. Now they just 
stay home, though some go to Mexico to seek medical treatment.
    Retirees that could not even afford a cheaper plan have had to drop 
medical coverage altogether and simply pray they stay healthy. Sadly, 
one of my fellow retirees who could not afford the monthly premiums has 
incurred significant out of pocket medical costs after his wife 
suffered two heart attacks and required two pacemakers. She also 
developed pneumonia and diabetes, which resulted in additional hospital 
stays. This has sent their medical costs skyrocketing to over $87,000. 
All this expense and no insurance, even though he was covered under a 
jointly negotiated collective bargaining agreement which provided 
health insurance until he and his wife both reached age 65.
    This summer our class action lawsuit against Raytheon Missile 
Systems resulted in a favorable decision for Raytheon retirees. In his 
findings, U.S. District Judge David Bury said that the contract 
``unambiguously provide vested medical benefits for retirees until age 
65 at no cost.'' Judge Bury has ordered Raytheon to make the affected 
retirees whole and reinstate them in the company paid medical health 
insurance.
    Unfortunately, Raytheon has appealed this decision and the 
suffering for Raytheon retirees and their dependents continues. It is 
important to note that Raytheon is a company that has grown fat on 
government contracts. According to Raytheon's 2007 Annual Report, 86 
percent of company sales are to the U.S. government, and all of the 
Missile Systems work is defense related. Since 2005 net income has 
tripled to nearly $2.6 billion and earnings per share have doubled. It 
angers me to think that a corporation like Raytheon, that shows 
contempt for the retirees that built the company, now benefits so 
generously from my tax dollars.
    This week there is much talk about bailing out the geniuses of Wall 
Street whose phony finance schemes threaten our economy, but when will 
Congress start protecting the people who spent a life time doing the 
real work that made America great? Although I am not an expert on the 
technicalities of providing health care, I would like to express my 
appreciation to Congressman Tierney for addressing this issue in H.R. 
1322, the Emergency Retiree Health Benefits Protection Act of 2007. We 
have to let corporate America know that the theft of retiree health 
benefits is unacceptable and I believe that
    H.R. 1322 will help us do that.
    Unfortunately, I do not believe that the current Administration 
shares Congressman Tierney's concern and I am afraid that we will have 
to wait for a new President and a new Congress before this legislation 
will move forward. In the meantime, Raytheon retirees need immediate 
help from a company that has put greed before justice. I call upon 
Congress take the necessary actions to make Raytheon fulfill its 
responsibilities to the people who made the company the success it is 
today.
    I thank you for this opportunity to testify on this important 
matter and look forward to your questions.
                                 ______
                                 
    Mr. Tierney. Mr. Kadereit, you have 5 minutes. Thank you.

    STATEMENT OF BILL KADEREIT, PRESIDENT, NATIONAL RETIREE 
                      LEGISLATIVE NETWORK

    Mr. Kadereit. Good morning, Mr. Chairman and members of the 
committee. My name is Bill Kadereit. I am from Heath, Texas, 
and I appear before you this morning as president of the 
National Retiree Legislative Network, or NRLN, an organization 
that represents more than 2 million retirees across America. I 
commend the committee and you, Mr. Chairman, for focusing on 
this vital important topic and I appreciate the opportunity to 
this morning to say a few words.
    Our retiree organizations serve a cross section of the top 
Fortune 500 companies such as Boeing, IBM, Johns Manville, 
Quest, Alcatel Lucent, Prudential, Raytheon, Detroit Edison, 
Pact Bell, GM, Ford, Chrysler, AT&T and a dozen or so others. 
Our members live in all 50 states and in over 300 congressional 
districts that are organized on a grassroots basis by 
congressional district. Although the majority of our membership 
is retired management employees, over 15 percent are retired 
union workers. Most of them feel betrayed by their former 
employers.
    At the heart of this betrayal is that so many employees, 
even retired managers, were unaware that their former companies 
could break their promises to retirees. For example, many 
retired managers say they were not aware that the lump sum 
pension payments offered as inducements to older workers to 
retire often contain came from workers' own pension plan 
assets, and that happens today. Nor did they realize that the 
health care benefits plans contained statements that reserved 
to the company the right to reduce or cancel health care 
benefits.
    Retiree exit interviews ended with a handshake and the 
passing of an envelope stuffed with benefit promises. Sandy, a 
retired IBM manager who saw his own insurance bill triple in 
2004 put it this way: I feel I misled a lot of people, that 
I've lied to people. Then he said, ``It does not sit well with 
me at all.'' This maybe little known to you, but capping and 
canceling health care liabilities in the '90's was beginning of 
a disturbing trend that continues to this day. International 
Paper used FASB 106 to book health care liabilities and then 
introduced caps on their health care liability to retirees. The 
effect was almost 19 million in earnings gains each year 
through year 2000.
    In 2000, 2001, and 2002 they capped benefits of newly 
acquired companies and through 2004 benefited by another $65 
million in profit. Sears implemented caps during the '90's and 
fed $383 million in earnings since 1997 to their bottom line. 
IBM implemented caps in 1999 that affected 190,000 retirees. It 
took 3 years for retiree health care costs to reach the $625 
per retiree cap, but in 2002, retiree premiums increased 67 
percent and another 29 percent in 2003.
    Adding the greatest insult to this injury is the heinous 
EEOC rule of 2007 which permits companies to discriminate 
against over-age-65 retirees who can have their benefits 
eliminated completely with companies claiming necessity in 
order to maintain benefits for younger workers. There are over 
10 million retirees over 65. Over-age-65 General Motors 
retirees will be forced onto Medicare without catastrophic, 
dental, vision, or hearing insurance they now have effective 
January 1, 2009. A GM retiree who must purchase supplemental 
insurance plus the four elements just cited that they are going 
to lose will be in the hole over $400 a month starting in 
January, 2009. A retiree on fixed income pension of $36,000, 
which would be $72,000 pay, roughly half pay, is going to lose 
between 18 to 20 percent of his or her fixed income if they 
replace all this coverage.
    Ford, Chrysler, and GM are casting a big shadow over the 
retirement landscape. Singling out over age 65 retirees sets an 
example that will lead to more companies targeting them. It is 
ironic that retirees under age 65 are no better protected now 
than before the EEOC rule became effective. There are no 
promises. They have no guarantees they will ever not have their 
health care cut. I am not blaming the big three. The trend is 
universal. The EEOC rule and the fact that ERISA does not vest 
retiree benefits are the real culprits here. For this reason, 
maintenance of health care benefits in effect on the day of 
retirement is a top NRLN priority. Congress must address the 
problem of catastrophic insurance also for all retirees and 
medical eligible Americans. It's just not the uninsured who are 
vulnerable.
    Robert, a 66-year-old Dallas retiree, has brain cancer. He 
gets free supplies of a tumor-fighting drugs through a programs 
for low-income families. His premiums have jumped by $365 a 
month. His deductible and co-pays and other out-of-pocket 
expenses are on top of that. It eats up all the pension which 
is $850 a month, his wife, LaRue, says. They have cashed in his 
401(K) and taken out a second mortgage on his home. Therefore, 
two other NRLN priorities are the inclusion of catastrophic 
coverage in Medicare and the creation of a Medicare buy-in 
option at costs for all under age 65 retirees.
    Elizabeth Warren, a Harvard Law School professor and one of 
the authors of Consuming Bankruptcy Project, examined a 
sampling of noncommercial bankruptcies from 1991 to 2007, and 
people 65 and up were more than twice as likely to file for 
bankruptcy at the end of 2007 as opposed to 1991. Those over 
75, the rate for those over 75 quadrupled.
    Mr. Tierney. Mr. Kadereit, might I just ask you to sort of 
summarize your three recommendations in one sentence or less 
for each. Thank you.
    Mr. Kadereit. I will. Thank you.
    First, we recommend preventing broken promises to retirees 
and mitigate the harm from the EEOC ruling by offering 
incentives to companies but requiring them to maintain their 
existing level of health care contributions for retirees. This 
incentive could take the form of a tax credit that would offset 
part of the cost of maintaining these caps. The NRLN calls this 
Maintenance of Cost Protection.
    Second, we recommend you modify ERISA to prohibit the use 
of defined pension plan assets to make lump sum severance 
payments and operating expenses to be paid by the corporations. 
This would ensure that pension funds could be applied to health 
care through IRS section 420 as long as a cushion of 120 
percent of the pension assets is maintained. Third, in 1986, 
Congress passed the Medicare Catastrophic Act of 1988, provided 
catastrophic insurance. The bill was attacked because it was 
declared prohibitively expensive by seniors at the time. The 
law was repealed in 1989. Now is the right time to work out a 
new bill that solves this catastrophic dilemma.
    Mr. Tierney. Thank you, Mr. Kadereit.
    [The statement of Mr. Kadereit follows:]

   Prepared Statement of Bill Kadereit, President, National Retiree 
                          Legislative Network

    Good morning, Chairman Miller and Members of the Committee. My name 
is Bill Kadereit and I am from Heath, Texas. I appear before you this 
morning as President of the National Retiree Legislative Network or 
NLRN, an organization that represents more than 2 million retirees 
across America. I commend you, Mr. Chairman, and the Committee for 
focusing on this vitally important topic and appreciate this 
opportunity to spend a few minutes with you this morning.
    Our retiree organizations serves a cross section of the top Fortune 
500 companies such as Boeing, IBM, Johns Manville, Alcatel Lucent, 
Prudential, Raytheon, Detroit Edison, Pacific Bell, GM, Ford, Chrysler, 
AT&T, and a dozen more.
    Our members live in all 50 states and over 300 Congressional 
Districts. Although the majority of our membership is retired 
management employees, over 15% are retired union workers. Most of them 
feel betrayed by their former employers.
    At the heart of this betrayal is that so many employees, even 
retired managers, were unaware that their former companies could break 
their promises to their retirees. For example, many retired managers 
say they were not aware that the lump sum pension payments offered as 
inducements to older workers to retire often came from workers' own 
pension plan assets. Nor did they realize that health care benefit 
plans contained statements that reserved to the company the right to 
reduce or cancel health care benefits. Retiree exit interviews ended 
with a handshake and the passing of an envelope stuffed with benefit 
promises.
    Sandy, a retired IBM Manager who saw his own insurance bill triple 
in 2004 put it this way: ``I feel I misled a lot of people, that I've 
lied to people;'' then he said, ``It does not sit well with me at 
all.''
    Capping and cancelling health care liabilities in the 90's was the 
beginning of a disturbing trend that continues to this day. 
International Paper used FASB 106 to book health care liabilities and 
then introduced caps. The effect was $18.7 million in earnings gains 
each year through 2000. In 2000, 2001 and 2002 they capped benefits of 
newly acquired companies and through 2004 benefited by another $65 
million. Sears implemented caps during the 90's and fed $383 million to 
earnings since 1997.
    IBM implemented caps in 1999 that affected 190,000 retirees. It 
took three years for retiree health care costs to reach the $625 cap 
but in 2002 retiree premiums increased nearly 67% and another 29% in 
2003.
    Adding the greatest insult to this injury is the heinous Equal 
Employment Opportunity Commission, or EEOC rule of 2007 which permits 
companies to discriminate against over-age-65 retirees who can have 
their health care benefits eliminated completely with companies 
claiming necessity in order to maintain benefits for younger workers. 
There are over 10,000,000 retirees over age 65.
    Over-age-65 GM retirees will be forced onto Medicare without the 
catastrophic, dental, vision, or hearing insurance they now have, 
effective January 1, 2009. A GM retiree, who must purchase supplemental 
insurance, plus the four elements just cited, will be in the hole over 
$400 a month starting in January 2009. A retiree on a fixed income 
pension of $36,000 is going to lose between 18-20% of his or her after 
tax income if they replace all lost coverage. Ford, Chrysler and GM are 
casting a big shadow over the retirement landscape. Singling out over 
age 65 retirees sets an example that will lead to more companies 
targeting them. It is ironic that retirees under age 65 are no better 
protected now than before the EEOC rule became effective.
    I am not blaming the Big Three. The trend is universal. The EEOC 
rule and the fact that ERISA does not vest retiree benefits are the 
real culprits. For this reason, maintenance of health care benefits in 
effect on the day of retirement is a top NRLN priority.
    Congress must address the problem of catastrophic insurance for all 
retirees and Medicare eligible Americans. It is not just uninsured 
people who are vulnerable.
    Robert, a 66-year-old Dallas retiree, has brain cancer. He gets 
free supplies of a tumor-fighting drug through a program for low-income 
families. His premiums have jumped by $365 a month, his deductible and 
co-pays and other out of pocket expenses are on top of that; ``it eats 
up all the pension'' which is $850 a month his wife, LaRue, says. They 
have cashed in his 401(k) account and taken out a second mortgage on 
their home. Two other NRLN priorities are the inclusion of catastrophic 
coverage in Medicare and the creation of a Medicare buy-in option, at 
cost, for all under age 65 retirees.
    Elizabeth Warren, a Harvard Law School professor and one of the 
authors of Consumer Bankruptcy Project, examined a sampling of 
noncommercial bankruptcies from 1991 to 2007, and people 65 and up were 
more than twice as likely to file and the filing rate for those 75 and 
older more than quadrupled. This is very real and frightening!
    So given all of this, what can Congress do to provide greater 
safeguards for retiree health benefits? The NLRN has three main 
recommendations:
    First, prevent broken promises to retirees and mitigate the harm 
from the EEOC ruling by offering incentives to companies but requiring 
them to maintain their existing level of health care contributions for 
retirees. This incentive could take the form of tax credits that would 
offset part of the cost. The NRLN calls this Maintenance of Cost 
Protection (MCP).
    Second, amend ERISA to prohibit the use of defined benefit pension 
plan assets to make lump-sum severance payments--an operating expense 
that should be paid from a restructuring reserve or from operating 
revenues. This will ensure that any pension fund surplus can be applied 
to retiree health care costs through use of IRS Sec 420 transfers to 
401(h) trusts, as long as a cushion of 120% of current assets is 
maintained in the pension fund.
    Third, in 1986, Congress passed the ``Medicare Catastrophic Act of 
1988'' that provided catastrophic insurance that would protect fixed 
income seniors from devastating health care bills. But it was attacked 
by seniors who declared it prohibitively expensive at the time. The law 
was repealed in 1989. Now is the right time to work out a new bill that 
solves the catastrophic dilemma.
    Thank you, Mr. Chairman and members of the Committee. We stand 
ready to work with you and your staffs on these and other legislative 
proposals that you may consider. I'd be happy to answer any questions 
you or the Committee members may have.
                                 ______
                                 
    [Additional submissions of Mr. Kadereit follow:]

                                                September 29, 2008.
    Dear Committee Members: On behalf of the more than 2 million 
members of the National Retiree Legislative Network, I want to express 
the NRLN's appreciation for the opportunity to testify at the September 
25, 2008 hearing on ``Safeguarding Retiree Health Benefits.'' The 
Committee is to be commended for its interest in the serious economic 
and social consequences caused by the erosion or cancellation of 
employer-sponsored health care benefits and the shifting of health care 
costs to retirees, most of whom exist on a fixed income. The document 
accompanying this letter is intended to provide additional support and 
elaboration on my testimony to the Committee.
    The remarks made during the hearing by Representative John F. 
Tierney reflected his in-depth knowledge of the broken corporate 
promises to provide health care benefits that have victimized millions 
of retirees. The sponsorship of H.R. 1322 by Representative Tierney and 
other members of the Committee demonstrates their belief that 
legislative action is necessary to protect the health care benefits 
that retirees have earned through decades of their labor. The NRLN 
applauds their leadership and effort in this area.
    The NRLN supports the concepts of H.R. 1322 and believes now is the 
time for Congress to integrate the NRLN's ideas and/or those of others 
and advance legislation as soon as possible. While cost-sharing must be 
capped, it is imperative that the cancellation of specific coverage and 
full plans be stopped.
    The EEOC rule presumes that Medicare offers the equivalent to 
company health care plans, but it does not. The rule totally disregards 
the enormous loss of catastrophic coverage as well as dental, vision, 
hearing and other unique health care plan coverages that are being 
taken away from retirees.
    The NRLN's proposals that were discussed at the hearing and 
elaborated upon in this accompanying document would protect over-age-65 
retirees from further income erosion. In addition, our proposals 
stipulate protection for retirees under 65, whereas the EEOC rule 
leaves the under age 65 protection to the fate of future judgments made 
by employer plan sponsors.
    I sincerely hope my testimony communicated to each of you that this 
is a huge issue regarding the loss of retiree fixed income that must be 
addressed now. It would be a grave error to think this issue can wait 
for national health care reform.
    The NRLN firmly stands behind the efforts of this Committee. Marta 
Bascom, the NRLN's Washington-based Executive Director, is prepared to 
work with Committee staff to help stem the suffering that millions of 
retirees and their spouses are experiencing due to the increased cost 
of health care insurance that is robbing them of their retirement 
security. She can be reached at 703-863-9611.
    Again, the NRLN deeply appreciates the invitation to participate in 
the hearing. The many emails and letters we have received from retirees 
across the nation who read my testimony emailed to them--and many 
viewed the webcast on the Committee's website--considered the hearing 
to be a glimmer of hope that some members of Congress recognize their 
plight and will try to help them.
            Sincerely,
                                  Bill Kadereit, President,
                              National Retiree Legislative Network.
                                 ______
                                 
    [The white paper, ``Safeguarding Retiree Health Care 
Benefits: Protecting Retirees From Fixed-Income Erosion,'' 
submitted by Mr. Kadereit, may be accessed at the following 
Internet address:]

  http://nrln.org/BKLETTERS/NRLN%20Whitepaper%20V15%20092908%20PDF.pdf

                                ------                                

    Mr. Tierney. Mr. Jones.

  STATEMENT OF C. WILLIAM JONES, CHAIRMAN, PROTECTSENIORS.ORG

    Mr. Jones. Good morning, Mr. Chairman, ranking member and 
members of the committee. My name is Bill Jones and I serve as 
the Protectseniors.org, a not for profit organization of 
retired union and management employees formed to tackle the 
issue of retiree health care. I am here today because we have a 
serious escalation of retiree health benefits slashed by 
corporate America. This is why with your help and leadership, 
Mr. Chairman, legislation in the form of H.R. 1322, the 
Emergency Retiree Health Benefits Protection Act must be 
passed. As you know, the original ERISA legislation prior to 
1974 included health care insurance as a critical part of the 
congressional plan to provide retiree income security. In fact, 
H.R. 1322 is the health care language drafted by Michael Gordon 
and included in the original ERISA legislation.
    The amendment that I am here to support was also drafted by 
Mr. Gordon in the year 2000 as requested by our association. 
For those who do not know, Michael Gordon was a very well known 
labor lawyer who was charged by Senator Jacob Javits and others 
to draft the original ERISA legislation and he lobbied for 
years to see it passed.
    The reason why I am here today representing millions of 
retirees is because H.R. 1322, the health insurance portion of 
the ERISA legislation, was eliminated from the final bill, in 
order to make it more likely that that legislation would pass. 
The proponents had every intention to amend ERISA at a later 
date to add back protections for health care insurance. If 
Michael Gordon were alive today he would be here to tell you 
the same thing.
    If we look back in time when most of the current retirees 
were in the workforce, we would see that larger American 
companies universally offered retiree health care to their 
employees and retirees as an incentive to retain trained 
employees. The workers accepted the IOU for retirement health 
care and other benefits in exchange for lower wages. Employers 
essentially deducted the cost of providing the insurance from 
wages and reminded employees that retirement health care and 
other benefits were part of their overall compensation package.
    Therefore, employers on the one hand acknowledged their 
implied contract yet in the early 1980s added a clause to their 
benefits package that said that they had the right to amend the 
plan at any time. The clause was called the Reservation of 
Rights clause. This clause was never communicated to the 
employees during their careers. Later, employers added the 
possibility of termination of benefits to the clause and placed 
the statement of possible termination of benefits in employees' 
retirement packages.
    Mr. Chairman, let me make this clear here. Employers told 
their employees annually for 20, 30, or 40 years that their 
reductions in pay and other perks were in exchange for their 
lifetime retirement health care and other benefits. It's also 
very important to understand that corporations benefited 
greatly by providing health care benefits in lieu of wages. 
They did not have to pay Social Security and other payroll 
taxes on benefits. They could also defer funding those 
obligations when the earnings were low unlike payroll that had 
to be paid on time. Further, since the amount of an employee's 
pension is directly proportional to his or her rate of pay, 
corporations saved on pension costs as well. General Motors was 
the first to renege on this implied contract.
    GM designed an incentive plan for management employees to 
retire early. They included free lifetime health care for the 
employee and spouse as one of the most attractive and 
beneficial features of the incentive plan. GM cashed in on all 
the benefits of promising retiree health care instead of paying 
higher wage only to renege on the obligation and cash in once 
again by stealing the promise and earned benefits form those 
who could least afford it. The retirees were presented with a 
lose-lose outcome while GM benefited with a win-win. The 
retirees chose to take GM to court and won in a lower court 
decision. GM then appealed the case and the appellate court 
found in favor of the company. GM retirees appealed to the 
Supreme Court and they were stunned by the Court's support of 
the appellate court decision. The three judges who dissented 
got it right stating that GM did create a vested right to 
lifetime health care benefits and criticized GM's corporate 
short-sightedness.
    Pension plans are protected by law, but now employers can 
cut health care for retirees at any time. The vast majority of 
retirees live on fixed incomes with nest eggs that have taken 
big hits during the recent stock market decline. Many don't 
have a contingency plan because they had no idea they needed 
one. Mr. Chairman, we are facing a health care crisis in this 
country and H.R. 1322 should be a part of the overall solution. 
The Federal Government cannot afford to replace these lost 
benefits nor can many of these retirees pay more to get the 
basic health care they need. We are not here asking for a 
handout. What we want is for companies to live up to the 
promises they made. Employees earned the benefit and companies 
promised to deliver. A promise made should be a promise kept.
    With your continued help and support, I am confident that 
we can get H.R. 1322 passed into law. Protectseniors is ready, 
willing and able to work with all of you in a bipartisan 
solution that's good for retirees, corporate America and the 
pocketbook of the Federal Government. With the crisis set off 
in the financial markets, we can't afford to pass additional 
taxes and burdens on to the American people and retirees cannot 
afford to pay more for the health care they earned and require.
    A solution to the health care crisis will require everyone 
to pitch in and we believe H.R. 1322 does just that, and I 
thank you, the committee members for your attention to this 
solution to the health care crisis.
    Mr. Tierney. Thank you very much, Mr. Jones.
    [The statement of Mr. Jones follows:]

       Prepared Statement of C. William Jones, ProtectSeniors.Org

    Mr. Chairman, Ranking Member and members of the Committee, my name 
is Bill Jones and I serve as Chairman of the Board of 
ProtectSeniors.Org, a not-for-profit organization formed to tackle the 
issue of retiree healthcare. Our sole mission is to advocate for 
passage of H.R. 1322, the Emergency Retiree Health Benefits Protection 
Act and save millions of Americans from certain poverty because of the 
loss of their earned healthcare benefits.
    I'm here today because we have seen an escalation of retiree 
healthcare benefits slashed by corporate America. This is why, with 
your help and leadership Mr. Chairman, legislation in the form of H.R. 
1322, the Emergency Retiree Health Benefits Protection Act, was 
introduced.
    Mr. Chairman, as you know, the original ERISA legislation in 1974 
included healthcare insurance as a critical part of the Congressional 
plan to provide retiree income security. In fact, H.R. 1322 is the 
original healthcare language drafted by Michael Gordon and included in 
the ERISA legislation.
    As we all know, and the reason I am here today representing 
millions of retirees, the H.R. 1322 healthcare insurance portion of the 
original ERISA legislation was eliminated from the final bill in order 
to lighten the load and make it more likely that the legislation would 
pass. Those close to the plan's design gave up the healthcare portion 
temporarily to pass the much needed guaranteed defined benefit pension 
law. They had every intention to amend ERISA at a later date to add 
protections for healthcare insurance. If Michael Gordon were alive 
today he would be here telling you the same thing.
    If we look back in time when most of the current retirees were in 
the workforce, we would see that larger American companies universally 
offered retiree healthcare to their employees and retirees as an 
incentive to retain trained employees.
    The workers accepted the IOU for retirement healthcare and other 
benefits in exchange for lower wages, and fewer vacations and holidays. 
Employers deducted the costs of providing the insurance from wages and 
reminded employees that the retirement healthcare and other benefits 
were part of their overall compensation package.
    Therefore, employers on the one hand acknowledged their implied 
contract, yet in the mid to late-1980s added a clause to their benefits 
practice that said they had the right to amend the plan at any time. 
This clause was called--the Reservation of Rights Clause.''
    This change was never communicated to the employees during their 
careers. In the mid-1990s some employers placed the statement of 
possible health benefits termination in the Reservation of Rights 
Clause and in employee's termination packages at retirement. Therefore 
thousands of employees who had signed their retirement agreement papers 
were then and only then given the fine print, which many never read, on 
the insurance plan's possible demise as they walked out the door. Since 
most never read the fine print or never saw it, they were devastated 
when they were forced to pay more and more for health insurance they 
had never planned on having to buy.
    Mr. Chairman, let me be clear here, employers told their employees 
annually for 20-30-40 years that their reductions in pay and other 
perks were in exchange for their retirement healthcare and other 
benefits. Yet after they were retired these same employers started to 
charge retirees for health issuance or stopped paying for it 
altogether.
    It is also very important to understand that corporations benefited 
greatly by providing healthcare benefits in lieu of wages. They did not 
have to pay Social Security and other payroll taxes on the benefit. 
They could also defer funding those obligations when earnings were low, 
unlike payroll that must be paid on time. Further, since the amount of 
an employee's pension is directly proportional to his or her rate of 
pay, corporations saved pension costs as well.
    Many of the retirees even took an early retirement program because 
they were offered a 100% paid healthcare insurance by a human resource 
or higher-level Vice president.
    General Motors was the first to renege on this implied contract. GM 
designed an incentive plan for management employees to retire early. 
They included free healthcare for the employee and spouse for the rest 
of their lives as one of the most attractive and beneficial features of 
the incentive plan. (See Sprague v. GM)
    However, in the early 1990s GM started charging for retiree health 
insurance. Several thousand retirees looked at their early retirement 
guarantee of 100% paid healthcare for life and consulted an attorney. 
The retirees chose to take GM to court to try and recover what was, in 
their mind, a clear case of corporate theft. The case was first settled 
in a lower court and the finding was in favor of the retirees.
    GM then appealed the case and the appellate court found in favor of 
the company. The retirees were shocked to find that a benefits practice 
none of the retirees were aware of contained some legalese which the 
Sixth Circuit Court said favored GM and the retirees were not actually 
guaranteed healthcare for life as the Vice President's retirement 
incentive letter stated. The benefits practice contained the previously 
mentioned--reservation of rights clause.''
    These courageous GM retirees could not believe it so they anted up 
hundreds of thousands more of their retirement earnings to carry the 
case to the US Supreme Court. Unfortunately for retirees all over the 
country, the Supreme Court agreed with the Sixth Circuit and refused to 
overturn the ruling. That ruling left all retirees who expected to have 
health insurance in retirement at the mercy of their former employers.
    Three judges dissented, stating that GM did create a vested right 
to lifetime healthcare benefits and criticizing GM's corporate 
shortsightedness.'' ``When General Motors was flush with cash and 
health care costs were low,'' the dissent stated, ``it was easy to 
promise employees and retirees lifetime healthcare. * * * Rather than 
pay off those perhaps ill-considered promises, it is easier for the 
current regime to say those promises were never made. (There is the 
tricky little matter of the paper trail of written assurances of 
lifetime healthcare, but General Motors, with the en banc majority's 
assistance, has managed to escape the ramifications of its now-
regretted largesse.'' According to the dissent, the majority's opinion 
``is heads, General Motors wins; tails, the employees lose.'')
    Let us make this situation very clear. General Motors promised to 
provide lifetime healthcare insurance for no charge to all employees 
who retired by a certain date. Thousands of dedicated employees agreed 
to that deal and retired by the deadline. GM later reneged on that 
commitment and the burden for the healthcare costs fell on the retirees 
who were living on a fixed income and who upheld their part of the 
bargain. This unbelievably dishonest act was determined by The Supreme 
Court to be perfectly legal.
    As we have seen in recent years the number of employers dropping 
health insurance has increased dramatically. With more and more 
employers claiming to not be able to compete globally, it is only a 
matter of time before most US corporations who still offer their 
retirees health insurance stop the practice and force these people who 
are on fixed incomes to buy expensive health insurance.
    The result is that most will become uninsured. They will become 
only one health problem away from bankruptcy and a ward of the State 
and Federal Medicaid System. Had they been paid, during their working 
years, a fair amount instead of a lower amount plus a promise of 
healthcare coverage in retirement, their pensions would have been 
significantly higher and they would have been able to afford to pay for 
their own healthcare insurance.
    Instead, GM cashed in on all the benefits of promising the 
healthcare insurance instead of paying a higher wage only to renege on 
the obligation and cash in once again by stealing the promised and 
earned benefits from those who could least afford it. The retirees were 
presented with a lose-lose outcome while GM benefited with a win-win.
    What makes cuts to medical coverage so hard for many retirees to 
accept is that these cuts are most often perfectly legal. As we have 
stated above, this is unlike pension plans, which are protected by 
Federal law. Former employers can cut health coverage at any time for 
retirees. A few retirees have successfully sued former employers for 
their benefits in recent years (See Qwest case). But employment lawyers 
say that can happen only in rare cases where employers didn't 
specifically reserve the right to change their minds in writing.
    ``Most company benefits practices contain what we call ``weasel' or 
Reservation of Rights clauses that protect them from any liability,'' 
says Norman Stein, a law professor who specializes in employee benefits 
at the University of Alabama. Stein says studies show few employees 
ever read the clauses anyway, which are often in fine print and in 
language that isn't always easy to understand.
    Of course, many working Americans are coping with rising health 
costs. But seniors often find themselves in a particularly difficult 
spot when their benefits shrink. The vast majority of retirees live on 
fixed incomes with nest eggs that have taken big hits during the recent 
stock market decline. Many don't have a contingency plan because they 
had no idea they needed one. They entered the workforce in a different 
time and place--employers were more paternalistic and unions were 
strong.
    Mr. Chairman, this is not a Republican or Democrat issue. Nor is it 
a union versus management issue. This is a retiree issue that needs to 
be fixed today. We are facing a healthcare crisis in this country and 
H.R. 1322 should be a part of the overall solution. The Federal 
government cannot afford to replace these benefits for millions of 
retirees. Nor can many of these retirees pay more out of their pockets 
to get the basic healthcare they need. You noticed I didn't say quality 
healthcare because this in most cases is too costly for them to afford.
    We are not here asking for a handout. What we do want is for 
companies to live up to the promises they made. A promise made should 
be a promised kept. With your continued help and support I'm confident 
we can get H.R. 1322 passed into law.
    Mr. Chairman and Ranking Member, we are ready, willing and able to 
work with all of you on a bi-partisan solution that is good for 
retirees, corporate America and the pocketbook of the Federal 
government. With the crisis set-off in the financial markets, we cannot 
afford to pass additional taxes and burdens onto the American people. A 
solution to the healthcare crisis will require everyone to pitch in. We 
believe H.R. 1322 does just that.
    Thank you and I would be happy to answer any questions at this 
time.
History of ERISA
    The Employee Benefits Security Administration is responsible for 
administering and enforcing the fiduciary, reporting and disclosure 
provisions of Title I of the Employee Retirement Income Security Act of 
1974 (ERISA). At the time of its name change in February 2003, EBSA was 
known as the Pension and Welfare Benefits Administration (PWBA). Prior 
to January 1986, PWBA was known as the Pension and Welfare Benefits 
Program. At the time of this name change, the Agency was upgraded to a 
sub-cabinet position with the establishment of Assistant Secretary and 
Deputy Assistant Secretary Positions.
    The provisions of Title I of ERISA, which are administered by the 
U.S. Department of Labor, were enacted to address public concern that 
funds of private pension plans were being mismanaged and abused. ERISA 
was the culmination of a long line of legislation concerned with the 
labor and tax aspects of employee benefit plans. Since its enactment in 
1974, ERISA has been amended to meet the changing retirement and health 
care needs of employees and their families. The role of EBSA has also 
evolved to meet these challenges.
    The administration of ERISA is divided among the U.S. Department of 
Labor, the Internal Revenue Service of the Department of the Treasury 
(IRS), and the Pension Benefit Guaranty Corporation (PBGC). Title I, 
which contains rules for reporting and disclosure, vesting, 
participation, funding, fiduciary conduct, and civil enforcement, is 
administered by the U.S. Department of Labor. Title II of ERISA, which 
amended the Internal Revenue Code to parallel many of the Title I 
rules, is administered by the IRS. Title III is concerned with 
jurisdictional matters and with coordination of enforcement and 
regulatory activities by the U.S. Department of Labor and the IRS. 
Title IV covers the insurance of defined benefit pension plans and is 
administered by the PBGC.
    Prior to a 1978 reorganization, there was overlapping 
responsibility for administration of the parallel provisions of Title I 
of ERISA and the tax code by the U.S. Department of Labor and the IRS, 
respectively. As a result of this reorganization, the U.S. Department 
of Labor has primary responsibility for reporting, disclosure and 
fiduciary requirements; and the IRS has primary responsibility for 
participation, vesting and funding issues. However, the U.S. Department 
of Labor may intervene in any matters that materially affect the rights 
of participants, regardless of primary responsibility.
    As a result of the enactment of the Federal Employees' Retirement 
System Act of 1986 (FERSA), EBSA has fiduciary and auditing oversight 
of the Thrift Savings Plan that was established by this Act.
Pre-ERISA Legislation
    Initially, the IRS was the primary regulator of private pension 
plans. The Revenue Acts of 1921 and 1926 allowed employers to deduct 
pension contributions from corporate income, and allowed for the income 
of the pension fund's portfolio to accumulate tax free. The participant 
in the plan realized no income until monies were distributed to the 
participant, provided the plan was tax qualified. To qualify for such 
favorable tax treatment, the plans had to meet certain minimum employee 
coverage and employer contribution requirements. The Revenue Act of 
1942 provided stricter participation requirements and, for the first 
time, disclosure requirements.
    The U.S. Department of Labor became involved in the regulation of 
employee benefits plans upon passage of the Welfare and Pension Plans 
Disclosure Act in 1959 (WPPDA). Plan sponsors (e.g., employers and 
labor unions) were required to file plan descriptions and annual 
financial reports with the government; these materials were also 
available to plan participants and beneficiaries. This legislation was 
intended to provide employees with enough information regarding plans 
so that they could monitor their plans to prevent mismanagement and 
abuse of plan funds. The WPPDA was amended in 1962, at which time the 
Secretary of Labor was given enforcement, interpretative, and 
investigatory powers over employee benefit plans to prevent 
mismanagement and abuse of plan funds. Compared to ERISA, the WPPDA had 
a very limited scope.
ERISA
    The goal of Title I of ERISA is to protect the interests of 
participants and their beneficiaries in employee benefit plans. Among 
other things, ERISA requires that sponsors of private employee benefit 
plans provide participants and beneficiaries with adequate information 
regarding their plans. Also, those individuals who manage plans (and 
other fiduciaries) must meet certain standards of conduct, derived from 
the common law of trusts and made applicable (with certain 
modifications) to all fiduciaries. The law also contains detailed 
provisions for reporting to the government and disclosure to 
participants. Furthermore, there are civil enforcement provisions aimed 
at assuring that plan funds are protected and that participants who 
qualify receive their benefits.
    ERISA covers pension plans and welfare benefit plans (e.g., 
employment based medical and hospitalization benefits, apprenticeship 
plans, and other plans described in section 3(1) of Title I). Plan 
sponsors must design and administer their plans in accordance with 
ERISA. Title II of ERISA contains standards that must be met by 
employee pension benefit plans in order to qualify for favorable tax 
treatment. Noncompliance with these tax qualification requirements of 
ERISA may result in disqualification of a plan and/or other penalties.
    Important legislation has amended ERISA and increased the 
responsibilities of EBSA. For example, the Retirement Equity Act of 
1984 reduced the maximum age that an employer may require for 
participation in a pension plan; lengthened the period of time a 
participant could be absent from work without losing pension credits; 
and created spousal rights to pension benefits through qualified 
domestic relations orders (QDROs) in the event of divorce, and through 
preretirement survivor annuities. The Omnibus Budget Reconciliation Act 
of 1986 eliminated the ability of employers to limit participation in 
their retirement plans for new employees who are close to retirement 
and the ability to freeze benefits for participants over age 65. The 
Omnibus Budget Reconciliation Act of 1989 requires the Secretary of 
Labor to assess a civil penalty equal to 20% of any amount recovered 
for violations of fiduciary responsibility.
    The department's responsibilities under ERISA have also been 
expanded by health care reform. The Consolidated Omnibus Budget 
Reconciliation Act of 1985 (COBRA) added a new part 6 to Title I of 
ERISA which provides for the continuation of health care coverage for 
employees and their beneficiaries (for a limited period of time) if 
certain events would otherwise result in a reduction in benefits. More 
recently, the Health Insurance Portability and Accountability Act of 
1996 (HIPAA) added a new Part 7 to Title I of ERISA aimed at making 
health care coverage more portable and secure for employees, and gave 
the department broad additional responsibilities with respect to 
private health plans.
Impact of the ``After the Fact'' removal of Corporate Retiree Health 
        Insurance Shrinking benefits
    The following is a sample of large companies who have reduced 
healthcare benefits of their retirees AFTER they retired. This list 
represents about 3 million retirees:
    Aetna Inc.: Stopped subsidizing health insurance for employees who 
retire after 2007. In January, they will stop funding all retirees' 
dental coverage.
    Bethlehem Steel Corp.: Filed for bankruptcy protection in 2001. 
They canceled all health benefits for its 95,000 retirees last year.
    Caterpillar Inc.: Starting in January, retirees will pay 
significantly more of their health insurance premiums, with costs 
ranging from $180 a month per individual to $370 per family.
    DuPont Co.: Now charges pre-Medicare retirees higher health 
insurance premiums than it charges current employees.
    Embarq: The wire line spinoff from Sprint stopped offering Medigap 
coverage to their Medicare eligible retirees in January 2008
    Kodak: Removed healthcare supplemental insurance for Medicare 
eligible retirees effective
    Levi Strauss & Co.: Stopped subsidizing Medigap coverage (private 
insurance that covers services Medicare does not) for all retirees and 
raised deductibles on prescription drugs to as much as $50. Company 
will stop subsidizing benefits for future retirees.
    Lucent Technologies: In January, stopped covering dependents of 
employees who left after May 1990 if they made more than $87,000; level 
will fall to $65,000 next year.
    Sears, Roebuck & Co.: Starting next year, all subsidies for retiree 
health benefits will be eliminated for new hires and employees younger 
than 40. Sears is also capping employer contributions to retiree health 
benefits at 2004 levels.
    Tribune Co. (owner of The Times): Has stopped subsidizing 
retirement health benefits for those hired after March 2003.
    Verizon Communications: Stopped all future retiree health benefits 
for management employees and has dramatically increased the retiree 
portion of health Insurance from 0 to $800+ per month depending on size 
of family.
    Whirlpool Corp.: Beginning this year, retiring employees are paying 
20% of their health insurance costs.
                                 ______
                                 
    Mr. Tierney. Mr. Yamamoto, please.

 STATEMENT OF DALE YAMAMOTO, PRESIDENT AND FOUNDER, RED QUILL 
                           CONSULTING

    Mr. Yamamoto. Thank you. Good morning, Mr. Chairman. My 
name is Dale Yamamoto. I am an independent consultant right now 
and I just recently retired from the international benefits 
consulting firm of Hewitt Associates where I served as a their 
chief health care actuary. I am pleased to be here today to 
talk about the employers' role in providing retiree health care 
to their retirees. And I provided a chart pack in your 
materials I will go through. I certainly don't have enough time 
to go through every one of them. But the charts provide kind of 
the key aspects of retiree health care including prevalence of 
the benefits design changes in employers have made in the past 
and think about in the future as well as ideas on prefunding 
and national average cost of the program. And during my 5 
minutes I have, I plan to focus primarily on the prevalence and 
design issues of the benefit program but certainly am prepared 
to discuss the other elements and aspects of my slides in the 
Q&A discussion.
    So on slide number 3, whenever you talk about retiree 
health care, it is generally focussed on large employers and 
slide number 3 shows and demonstrates why. It is because most 
employers--it is mostly a large employer benefit program as 
shown by this chart because only about 4 percent of the smaller 
employers offer retiree health care benefits and it is really 
focused on larger employers.
    Slide number 4 shows the decline and prevalence of the 
benefits. And you will notice that most of the decline happened 
in the 1990s. And if you flip again to slide number 5, it is a 
pretty simple slide that shows you, I think, some of the 
drivers behind the decline in prevalence of the benefits in the 
first place.
    Some notable legislation I have left out, of course, was 
Medicare adopted in 1965 and ERISA in 1974. Those were 
legislation that encouraged the offering of retiree health care 
benefits and started with DEFRA in 1984, and we start to see 
some decline, but the biggest impact probably was what the 
Financial Accounting Standards Board did in 1990 when they 
adopted FASB 106, which required employers to accrue for the 
cost in advance of providing the benefits, and they again 
provided some other limitations or additional accounting 
requirements upon employers back in 2006, most recently. That 
moved a lot of the funded status directly on to the balance 
sheets.
    And about the same time, the Governmental Accounting 
Standards Board adopted GASB 43 and 45 that provided very 
similar accounting treatments for municipalities and counties; 
so I think we will see the same phenomena happen in the public 
sector now.
    Moving to slide number 6, one of the things that is not 
evident when you look at the prevalence of retiree health care 
offered by employers is what does happen to current retirees 
and you will notice on slide number 6 the percentage of 
employer-based coverage has remained relatively stable over the 
last 15 years. And I would say that is primarily because when 
employers do eliminate coverage, it is generally for future 
retirees and future retirees who retire 5 years into the future 
and generally grandfather, current retirees, and those that are 
ready to retire in the short-term near future.
    So if I jump to slide number 9, this shows--gives you a 
picture of the design changes that employers have made between 
2005 and 2006. This is the latest data that we have from a 
survey that the Kaiser Family Foundation does in conjunction 
with Hewitt Associates. You will see that most of the design 
changes that are up on the top have been geared toward changes 
in the plan design, cost-sharing changes, increase in the 
deductibles, increase in co-pays to retirees, perhaps increase 
in retiree contributions. It isn't until you get down toward 
the middle that you find 11 percent of the employers did 
terminate coverage for future retirees between those 2 years. 
And in fact, if you move your eyes a couple down, you will see 
that 8 percent actually improved or added some coverage for 
retirees. And I have to say in the 25 years of my experience 
consulting with employers and working with them on retiree 
health care benefits, I have always found that virtually 
everyone has a very difficult time making decisions on changes 
to their retiree health care benefits and I am sure when it 
gets to the senior management level they agonize over even 
these changes in the cost-sharing provisions and certainly when 
they are about to terminate coverage for future retirees it's--
I am sure they have many sleepless nights trying to make that 
decision of whether or not to do it.
    So it is not a position that is taken lightly. And that 
is--I will end there. That is my final remarks and I will be 
certainly happy to answer any questions in the Q&A discussion.
    Mr. Tierney. Thank you very much.
    [The statement of Yamamoto follows:]

     Prepared Statement of Dale H. Yamamoto, President, Red Quill 
                            Consulting, Inc.

    Good morning Mr. Chairman, my name is Dale Yamamoto. I am currently 
an independent consultant and recently retired from Hewitt Associates 
where I served as their chief healthcare actuary. I am pleased to be 
here today to talk about the employers' role in providing health 
insurance to retirees.
Focus
    The chartpack that I have provided to you includes several slides 
outlining the key aspects of retiree health care including the 
prevalence of the benefits, discussion of key design features including 
Medicare Advantage and prescription drugs as well as slides on 
prefunding, and national costs. I plan to focus on the prevalence and 
design slides and I am prepared to discuss the other slides as well.
Prevalence
    Most of my presentation will focus on the programs offered by 
larger employers because as you can see on Slide 3, it is that group 
that primarily has offered the benefits.
    Slide 4 shows the declining prevalence of retiree benefits offered 
by employers. The top two lines are data from Hewitt's SpecBook 
database of over 1,000 large employers while the bottom shows the 
results from the latest Kaiser Family Foundation survey. Both show a 
declining percentage of employers offering the benefit with most of the 
decline happening during the 1990s.
    The key reasons for the decline are shown on Slide 5: In the early 
1980s, tax legislation restricted the amount a company could prefund 
this benefit in a trust fund. Various industry groups, including ERIC, 
have asked for relief of these limitations since the enactment. And in 
1990; the Financial Accounting Standards Board (FASB) adopted a new 
accounting rule (FAS 106) requiring advance accounting of the benefit--
similar to pension plans. These rules were again tightened in 2006 and 
the Governmental Accounting Standards Board (GASB) adopted similar 
rules (GASB 43 and 45) for states and municipalities.
    A key point to understand is that while the statistics show a 
decline in the percentage of employers offering retiree health 
coverage, Slide 6 shows that retirees covered by employer-sponsored 
plans have remained relatively steady. The reason is that, in most 
cases, employers ``grandfather'' existing and soon-to-be retirees in 
the current plan and do not terminate their benefits.
Design
    Skipping to Slide 9 shows you the types of changes that employers 
made between 2005 and 2006. 11% dropped coverage for future retirees. 
And 8% actually improved coverage in some fashion.
    In my experience, retiree health care plans are one of the few 
benefit offerings that are difficult for employers to change. Senior 
management agonize over any decision to reduce these benefits and I 
know there have been sleepless nights for those trying to decide to 
terminate coverage--even for future retirees. In short decisions to 
change benefits in any way because of changing circumstances are not 
made lightly.
    Thank you again for the opportunity to testify and I will be happy 
to address any questions.




















                                 ______
                                 
    Mr. Tierney. Mr. Macey.

STATEMENT OF SCOTT MACEY, SENIOR VICE PRESIDENT AND DIRECTOR OF 
  GOVERNMENT AFFAIRS, AON CONSULTING, INC., ON BEHALF OF THE 
                    ERISA INDUSTRY COMMITTEE

    Mr. Macey. Good morning, Mr. Chairman, ranking member, and 
members of the committee. I very much appreciate the 
opportunity to appear here today to discuss these very 
important issues. As the chairman indicated, I am Scott Macey, 
and I am executive vice president and senior director of 
government affairs for Aon Consulting and I am appearing here 
today on behalf of the ERISA Industry Committee commonly known 
as ERIC. I would like to preface my remarks by the following: 
These are compelling stories that we have heard this morning, 
and I think we can all empathize with them. And my testimony 
certainly isn't intended to denigrate the impact or the reality 
that various people that have incurred them have to face. We 
may differ on identifying the source of the problem or the 
possible solutions, but I think we can all agree this is an 
important that needs to be addressed by Congress and society.
    ERIC commends the committee for its focus on retiree health 
benefits. Our Nation's senior citizens need and deserve access 
to quality affordable post-retirement health care. The problem 
of the lack of such coverage is true especially for workers who 
retire before they become eligible for Medicare. Employers also 
feel the pressure of our health care system acutely. ERIC's 
members share the committee's concern over the loss of health 
care access and coverage for workers, retirees, and other 
Americans. Indeed, we and others have warned repeatedly that 
increasing health care costs, changes to accounting rules, and 
insufficient funding rules would result in increasing pressure 
on both active and retiree health care. Although we welcome the 
committee's attention to this important national issue even in 
the midst of a national financial crisis, we are concerned 
about the approach being proposed.
    The bill that is the focus of today's hearing, we believe, 
misinterprets the underlying reasons for the problem, 
concluding that employers are the problem and proposes a 
solution that is likely to have significant unintended adverse 
consequences. I would like to raise four key points for the 
committee's consideration:
    First, if an employer promises lifetime health benefits to 
its retirees, that commitment is protected under current law. 
Second, if an employer has lawfully reserved the right to 
change retiree benefits and communicated that right and 
reservation to participants, that legal right should also be 
protected. Third, if employers are prohibited from changing the 
benefits in place when a worker retires, this mandate will have 
the unintended likely consequence of depriving millions of 
future retirees of these important benefits.
    Fourth, the effort to safeguard retiree health benefits 
will succeed only if it addresses the pervasive problems in the 
American health care system. These are societal problems that 
require a comprehensive solution.
    Existing law does protect promised benefits. The Act rests 
on a mistake and assumption that employers are breaking their 
promises to provide retirees with lifetime post-retirement 
health benefits. This is simply not the case. If an employer 
has made an unconditional commitment to provide post-retirement 
benefits, the courts will uphold that commitment. The bill will 
penalize employers that voluntarily provide post-retirement 
benefits. The bill does not seek to just enforce existing 
promises. Instead, the bill seeks to create new promises where 
none existed before. The bill would prohibit an employer from 
reducing post-retirement benefits for workers who have already 
retired even though the company reserved that right and told 
employees about it.
    If an employer has already exercised its right to reduce 
post-retirement benefits for example by asking participants to 
share in the rising cost of medical care, the bill would give 
each retiree the option to restore prior benefits. In short, 
the bill would rewrite private benefit plans retroactively in 
order to convert an employer's voluntary conditional decision 
to offer post-retirement health benefits into an unconditional 
lifetime guarantee. The bill will force employers to eliminate 
the benefits they provide today. The key unintended consequence 
will be a dramatic decline in the number of employers that are 
able to provide post-retirement benefits to their employees 
under the legal straight jacket that the bill would impose. An 
employer must be able to change its health benefit programs to 
reflect the changing conditions in which the both employer and 
its plans operate.
    In fact, ERISA recognizes the clear distinctions between 
pension plans and welfare plans and provides for the vesting of 
the former but not the latter. The bill's retroactive 
imposition of new and possibly unaffordable liabilities will 
have a tremendous chilling effect on the provision of both 
retiree health benefits and other benefits. It will force 
employers to deal with a Faustian bargain of either terminating 
health benefits for future retirees or signing up permanently 
to an unknown escalation of cost and price volatility.
    And, finally, the problem calls for a comprehensive 
solution. Proposals that would lock in companies to the current 
benefits fail to address the factors that cause companies to 
reduce the benefits in the first place. The erosion of retiree 
health benefits is a symptom of the problem in the American 
health care system, not the cause. These are societal problems 
that require societal and more comprehensive solutions. The 
ERISA Industry Committee has proposed some comprehensive 
provisions but we would be willing to--very happy to work with 
the committee and others on more targeted resolutions such as 
Medicare access for early retirees, access-only group plans, 
and things like that. Thank you so much for the opportunity to 
present our views today.
    Mr. Tierney. Thank you, Mr. Macey.
    [The statement of Mr. Macey follows:]

Prepared Statement of Scott J. Macey, Senior Vice President, Government 
   Affairs, Aon Consulting, on Behalf of the ERISA Industry Committee

    Good morning, Mr. Chairman and members of the Committee. I very 
much appreciate the opportunity to speak with you and the Committee 
today about retiree health benefits.
    I am Senior Vice President and Director of Government Affairs of 
Aon Consulting, a leading human capital and management consulting firm. 
I am appearing today on behalf of The ERISA Industry Committee, also 
known as ``ERIC.'' I am also a member of ERIC's Executive Committee and 
its former Chairman. ERIC is a nonprofit association committed to the 
advancement of the employee retirement, incentive, and welfare plans of 
America's largest employers. ERIC's members provide comprehensive 
benefits directly to some 25 million active and retired workers and 
their families. Together, ERIC member companies have provided benchmark 
life security plans directly to more than 10% of the U.S. population.
    ERIC commends the Committee for its focus on retiree health 
benefits. Our nation's senior citizens need and deserve access to 
quality, affordable postretirement health care. Years of double-digit 
inflation in medical costs have eaten away at workers' retirement 
income, making it increasingly difficult for retirees to afford even 
the most basic post-retirement health benefits. This is true especially 
for workers who retire before they become eligible for Medicare.
    Employers also feel these pressures acutely. As American companies 
struggle to compete in a global economy, they labor under the burden of 
a health care system that is among the most expensive in the world. 
National expenditures on health care now consume 16 percent of our 
gross domestic product. In the United States, this burden falls much 
more heavily on private companies than it does in other developed 
nations, where the government plays a larger role in providing health 
care and controlling medical costs.
    ERIC's members share the Committee's concern over the loss of 
health care access and coverage for workers, retirees, and other 
Americans. Indeed, we and others have warned repeatedly that increasing 
health care costs, changes to accounting rules, and insufficient 
funding rules would result in increasing pressure on both retiree and 
active health care coverage.
    Although we welcome the Committee's attention to this important 
national issue even in the midst of a national financial crisis, we are 
concerned, however, about the approach being proposed. The bill that is 
the focus of today's hearing misinterprets the underlying reasons for 
the problem, i.e., that employers are the problem, and proposes a 
solution that is likely to have significant unintended adverse 
consequences. The Emergency Retiree Health Benefits Protection Act 
would single out large employers that have voluntarily provided post-
retirement health coverage to their workers, and would require these 
employers--and only these employers--to preserve for the remainder of a 
retiree's life the coverage that was in effect at his retirement. The 
bill would prohibit employers from changing these benefits regardless 
of future, and unknown, changes in economic conditions, costs of 
medical care or company financial status, and would ignore potential 
future changes in the nation's healthcare system.
    I would like to raise four key points for the Committee's 
consideration.
    First, if an employer promises lifetime health benefits to its 
retirees, that commitment is well-protected under current law. There is 
no need for legislation to safeguard benefit commitments.
    Second, if an employer has lawfully reserved the right to change 
retiree benefits--and employees have been informed of that right, that 
legal right should also be protected. Employers that have voluntarily 
offered post-retirement health benefits in the past should not be 
penalized making a more generous set of compensation promises at one 
point in time by having those benefits retroactively locked in.
    Third, if employers are prohibited from changing the benefits in 
place when a worker retires, this mandate will have the unintended 
consequence of depriving millions of future retirees of employer-
provided health benefits. Employers will cease to offer retiree health 
coverage if they do not have the flexibility to modify the coverage as 
necessary to reflect changing circumstances. Indeed, in spite of 
earlier warnings to policy makers by employer groups and others, 
employers have in fact curtailed new retiree health arrangements due to 
increasing costs and new accounting rules.
    Fourth--and most important as it addresses the real root of the 
problem--the effort to safeguard retiree health benefits will succeed 
only if it addresses the pervasive problems in the American health care 
system that force employers to reduce post-retirement health benefits, 
and that impede access to affordable health coverage by both working 
and non-working Americans. These are societal problems that require a 
comprehensive solution. A proposal that subjects a small group of 
companies to punitive measures will not, in the end, help to resolve 
the much greater issues and concerns that are at stake.
Existing Law Protects Promised Benefits
    The Emergency Retiree Health Benefits Protection Act rests on a 
mistaken assumption: that employers are breaking their promises to 
provide retirees with lifetime post-retirement health benefits. This is 
simply not the case. If an employer has made an unconditional 
commitment to provide post-retirement benefits, that commitment will be 
enforced under current law.
    Courts have ruled repeatedly that an employer may not change the 
benefits of a retired worker unless written plan documents reserve the 
employer's right to amend or terminate post-retirement benefits, and 
the employer communicates this right to its workers clearly and 
unequivocally before they retire. Accordingly, under current law, an 
employer may reduce post-retirement benefits only if the employer can 
show that it did not commit to provide these benefits permanently.
The Bill Will Penalize Employers That Voluntarily Provided Post-
        Retirement Benefits
    The bill does not seek just to enforce existing promises--those 
promises are enforceable already under current law, and are routinely 
protected by the federal courts. Instead, the bill seeks to create new 
promises where none existed before.
    The bill would prohibit an employer from reducing post-retirement 
benefits for workers who have already retired, even though the employer 
has included in its retiree health plan ``a provision specifically 
authorizing the plan to make post-retirement reductions in retiree 
health benefits.'' The bill would permit an employer to terminate 
health benefits for current retirees only if the employer can show that 
the company otherwise will be unable to continue in business.
    If an employer has already exercised its right to reduce post-
retirement benefits--for example, by asking retirees to share a portion 
of rising medical costs through increased contributions--the bill would 
give each retiree the option to restore the benefits to their former 
level. The bill would apparently even prohibit an employer from 
implementing health care networks and other arrangements that are 
responsive to the changing environment of our health care delivery 
system.
    In short, the bill would re-write private benefit plans 
retroactively in order to convert an employer's voluntary, conditional 
decision to offer postretirement health benefits into an unconditional 
lifetime guarantee. Employers that have been less generous, and have 
provided no post-retirement benefits to their employees, would be 
rewarded with a decades-long competitive advantage. We also have 
concerns about constitutional challenges to the retroactive provisions 
of the bill as well as the fundamental fairness of that approach.
The Bill Will Push Employers to Eliminate The Benefits They Provide 
        Today
    If the bill is enacted, the unintended consequence will be a 
dramatic decline in the number of employers that are able to provide 
post-retirement benefits to their employees. Few companies will risk 
offering retiree health benefits if they are confined in the legal 
straitjacket that the bill would impose.
    An employer must be able to change its benefit programs to reflect 
the changing conditions in which its business operates: it cannot lock 
in retiree health coverage without regard to escalating costs, 
increasing pressures from global competition, innovations in health 
care delivery, development of new government programs, or any of the 
myriad other factors that cause employers to exercise their right to 
reduce post-retirement health benefits or signing up permanently to an 
unknown escalation of cost and price volatility. In fact, ERISA 
recognizes the clear distinctions between pension and health and 
welfare plans and has provided for the vesting of the former, but not 
the latter. The bill's retroactive imposition of new and possibly 
unaffordable liabilities will also have a chilling effect on employers' 
willingness to continue to sponsor other benefit plans that could be 
subject to similar mandates.
    Faced with the prospect of permanent, unalterable retiree benefits, 
employers that today provide millions of retirees with access to 
affordable postretirement health care will be presented with the 
Faustian bargain of either terminating health benefits for future 
retirees or signing up permanently to an unknown escalation of cost and 
price volatility. Employers must keep their costs under control in 
order to remain competitive in a challenging global economy. 
Accordingly, to the extent that the bill retroactively locks in 
coverage for current retirees, the inevitable result will be to divert 
employers' compensation resources from other compensation and benefit 
programs at the expense of other workers.
The Problem Calls For a Comprehensive Solution
    Proposals that would lock-in companies retiree health benefits fail 
to address the factors that cause companies to reduce or eliminate 
these benefits in the first place. These proposals do not address the 
underlying problem of inadequate individual access to affordable health 
care in our society.
    Many companies have gone to great lengths to preserve their 
postretirement health benefits as long as they can, in the face of 
mounting pressures that are rapidly making these programs 
unsustainable. Employers that provide comprehensive health benefits 
today are under severe stress. They must contend with excessive medical 
cost increases, complex and inflexible rules governing benefits, 
burdensome and often unnecessary litigation, shifting accounting 
standards, inadequate funding mechanisms, and federal and state 
mandates that constantly impose new obligations on a system that is 
already terribly overburdened.
    The erosion of retiree health benefits is a symptom of the problems 
in the American health care system, not the cause. These are societal 
problems that call for a comprehensive solution involving all of the 
stakeholders. It will take the best efforts of federal and state 
policymakers, industry leaders, trade associations, and private 
individuals to address these problems.
    I do not come before this Committee seeking to preserve the status 
quo or to ignore the serious issue that the bill attempts to address. 
Clearly America's health care system must change in fundamental ways if 
it is to provide our citizens with the care they deserve. ERIC is 
committed to working constructively to achieve meaningful and lasting 
change.
    ERIC has proposed a ``New Benefit Platform for Life Security'' to 
create a framework for a 21st century life security plan that is more 
efficient, controls costs, is more transparent, leverages information 
technology to empower consumers, and ensures the delivery of high 
quality retirement and health coverage to all Americans. We would 
welcome an opportunity to work with the Committee to build solutions 
around this framework.
    That completes my prepared statement. I will be pleased to answer 
any questions the Chairman or any members of the Committee might have. 
Thank you for your attention.
                                 ______
                                 
    Mr. Tierney. Professor Stein.

  STATEMENT OF NORMAN STEIN, DOUGLAS ARANT PROFESSOR OF LAW, 
                     UNIVERSITY OF ALABAMA

    Mr. Stein. The clock is still on Scott.
    Mr. Tierney. Go for it.
    Mr. Stein. Mr. Chairman and members of the committee, thank 
you for the opportunity to address you today on this really 
very important subject. My statement this morning focuses on 
the state of the law with respect to an employee's promise to 
repay retiree health benefits. The law begins with a statute. 
The relevant statute here, ERISA, does not provide for 
mandatory vesting of health benefits the way it does for 
retirement benefits. ERISA does, however, hold employers 
responsible for the contractual promises they make to their 
employees.
    In retiree health plans, then the relevant statutory 
question is whether the employer has made a binding promise to 
its employees to pay them health benefits after they retire. 
Federal judges are often called upon to determine whether an 
employer has, in fact, made such a promise. The legal question 
is one of contract. Courts, for the most part, have not been 
sympathetic to employee claims. Indeed, some of the opinions 
seem to channel the surrealism of a Franz Kafka novel. I want 
to focus up on a case that is a paradigmatic example of judges 
stretching neutral-sounding concepts to favor an employer's 
right to break a promise over an employee's to rely on a 
promise. The case is Sprague versus General Motors, which Mr. 
Jones briefly summarized earlier. Sprague involved former 
employees receiving benefits under a General Motors retiree 
health plan. General Motors had repeatedly told its employees 
that retiree health benefits were lifetime benefits and that GM 
would pay their full cost, but eventually GM changed its 
corporate mind and amended the plan to include expensive 
deductibles and co-pays. GM's former employees sued to compel 
GM to keep its promises. About 50,000 of the retirees had 
retired early and I will focus on their story.
    During the 1970s and 1980s, GM offered incentives to older 
employees to take early retirement. The benefits to which such 
employees were entitled included, quote, ``lifetime health 
benefits.'' Here is how GM typically described those benefits: 
``Full, basic health care coverage for life at no cost.'' 
That's a quote. Most people would understand that statement to 
mean what it seemed to say, that if you retire, you can count 
on GM providing you with health benefits for your life.
    Moreover, over the years, GM had distributed to its 
employees official plan summaries, other written documents, 
and, in some cases, wrote individualized letters to particular 
employees that made representations identical to or similar to 
the one I just read. The actual GM retiree health plan, 
however, was a legal document with boilerplate language giving 
GM the right to modify or terminate the plan. It is unlikely 
that very many, if any, employees actually ever saw that plan 
document. And even if they had they might have reasonably 
concluded that the explicit representations GM made about 
lifetime benefits trumped any reserved employer rights.
    The trial court and a three-judge appeals court ruled for 
the employees but the entire court of appeals reheard the case 
and reversed. Here is the essence of what it held: The only 
document that counts is the formal plan document. None of the 
other GM communications could be consulted unless the formal 
plan document itself was ambiguous about whether the benefits 
had vested, but according to the court, the plan document was 
not ambiguous since the document expressly reserved GM's right 
to modify or terminate the plan.
    So the employees, including the early retirees who signed 
away very various rights to accept what they thought were 
actually benefits rather than temporary gifts, were left with 
what most Americans, with the exception of a handful of Federal 
judges, might call a broken promise.
    Does this mean employees always lose? No. Employees with 
collective bargaining agreements can sometimes win their cases 
based on a negotiated agreement, especially if their case is 
heard by judges whose world view does not predispose them to 
favor employer prerogative over worker financial security. In 
other cases, the plan document might be ambiguous and other 
employer communications might be considered, although here the 
Sixth Circuit seemed to say that a plan that includes a 
reservation of rights clause is crystal clear evidence that the 
employer has made no binding promise no matter what else the 
employer said.
    So what should Congress do? Several people have suggested 
that it do nothing, but doing nothing means that retirees 
cannot rely on what appear to be clear promises and courts will 
occasionally rule for employees but more often will not. As 
Bill Payne, a lawyer who has litigated many retiree health care 
cases has observed, the outcome is often foreordained by the 
ideological predisposition of the judges hearing a case rather 
than by the actual facts of the case, not that the facts are 
irrelevant.
    Congress could try to level the playing field for employees 
with clear, reasonable and consistent rules to guide judges who 
must determine whether the employer has made a binding promise 
to its employees. Or Congress might say that clear, written and 
oral representations from the employer become part of the plan 
even if not embodied in the actual written formal plan 
document. Or Congress might consider legislation such as that 
introduced by Congressman Tierney that would make it difficult 
for an employer to terminate retiree health benefits once an 
employee has retired. Or Congress might try to help all older 
Americans have access to decent and affordable health care, not 
just those who were fortunate enough to have an employer who 
promised such benefits and then fortunate enough to have their 
case assigned to a Federal judge who believes that promises 
made should be promises kept even if those promises were made 
to an employee.
    Mr. Tierney. Thank you, Professor.
    [The statement of Mr. Stein follows:]

Prepared Statement of Norman P. Stein, Professor, University of Alabama 
                             School of Law

    Mr. Chairman, Members of the Committee, I am Norman Stein, a 
professor at the University of Alabama School of Law, where I am 
privileged to hold the Douglas Arant Professorship. This semester, I am 
also working at the Pension Rights Center here in Washington, D.C. The 
Pension Rights Center is the nation's only consumer organization 
dedicated solely to promoting and protecting the pension rights of 
workers, retirees and their families. Today, however, the views 
expressed in my testimony are mine alone and do not necessarily 
represent the views of either the Pension Rights Center or the 
University of Alabama.
    My statement this morning focuses on the state of the law with 
respect to an employer's promise to pay retiree health benefits. I will 
show that the law is hostile to reasonable employee expectations about 
retiree health benefits--expectations created by the employer and from 
which the employer benefited in terms of increased employee loyalty and 
productivity.
    The law begins with the statute. ERISA does not provide for 
mandatory vesting of health benefits the way it does for retirement 
benefits, regardless of how long an employee worked. ERISA does, 
however, hold employers responsible for the contractual promises they 
make to their employees. In retiree health care plans, then, the 
relevant statutory question is whether the employer has made a binding 
promise to its employees to pay them health benefits after they retire. 
Federal judges are often called upon to determine whether an employer 
has made such a promise to its employees. The legal question is one of 
contract.
    As I have suggested, courts have not, for the most part, been 
sympathetic to employee claims. Indeed, some of the opinions seem to 
channel the surrealism of a Franz Kafka novel. I want to focus on a 
case that is generally regarded as the paradigmatic example of judges 
stretching neutral-sounding concepts to elevate an employer's right to 
break a promise over an employees' right to rely on a promise. The case 
is Sprague v. General Motors.
    Sprague involved over 80,000 former salaried employees who were 
receiving benefits under a General Motors retiree health plan. General 
Motors repeatedly told its employees that the retiree health benefits 
were lifetime benefits and that General Motors would pay their full 
cost. But eventually, General Motors changed its corporate mind and 
amended the plan to introduce expensive deductibles and co-pays and to 
eliminate outright valuable benefits. I think from the vantage point of 
the retiree, there was a frightening aspect to GM's actions that went 
beyond the immediate changes to the plan. By amending the plan, GM 
signaled to the employees that it might make further changes to the 
plan and could, if it chose, eliminate the plan altogether.
    GM's former employees sued to compel GM to keep its promises. About 
50,000 of the retirees had retired early and I will focus on their 
story.
    During the 1970s and 1980s, GM offered incentives to many of its 
older employees to retiree early. The benefits to which the employees 
were entitled included ``lifetime'' health benefits. Here is how GM 
typically described the healthy benefits to people trying to decide 
whether to take early retirement: ``full basic health care coverage for 
life at no cost to the retirees.'' Most people would understand that 
statement to mean what it seemed to say: that if you retire, you can 
count of GM providing you with lifetime health benefits for your life. 
The employees who opted for early retirement, partly on the basis of 
these lifetime health benefits, waived legal rights that they might 
have had against GM.
    Moreover, over the years, GM had distributed to its employees 
official plan summaries, other written documents and, in some case, 
individualized letters to particular employees, that made similar 
representations to the one I just read, and GM managers often stressed 
to the employees the value of the lifetime medical benefits they would 
receive when they retired.
    The actual GM retiree health plan, however, was a legal document 
that included boilerplate language reserving to GM the rights to modify 
or terminate the plan. It is unlikely that very many, if any, employees 
actually read the actual formal plan document (and it is likely that 
few employees ever even received it). Moreover, an employee might well 
have thought the explicit representations about lifetime benefits--made 
many times in many forms over many years--would have trumped any 
reserved employer rights.
    Both the trial court and a three-judge panel of the Sixth Circuit 
Court of Appeals ruled for the employees under these circumstances. The 
gist of their rulings was that GM promised lifetime benefits to its 
early retirees and could not unilaterally break that promise.
    The entire Sixth Circuit Court of Appeals, however, heard the case 
and reversed. Here is the essence of what it held: the only document 
that counted was the formal plan document. None of the other GM 
communications--not the summary plan descriptions, not the letters, not 
the other communications--could be consulted unless the formal plan 
itself was ambiguous about GM's right to modify the plan. But the plan 
document was not ambiguous, according to the Court, since that document 
expressly reserved GM's right to modify or terminate the plan. So the 
employees, including the early retirees who signed away various rights 
to accept what they thought were actual benefits rather than temporary 
gifts, were left with what most Americans, with the exception of a 
handful of judges, might call a broken promise.
    Does this mean employees always lose? No. Employees with collective 
bargaining agreements can sometimes win their cases based on the 
negotiated agreement, especially if their cases are heard by judges 
whose world view does not predispose them to favor employer autonomy 
over worker financial security. In other cases, the plan document might 
be ambiguous and other employer communications might be considered, 
although here the Sixth Circuit seemed to say that a plan that includes 
a reservation of rights clause is crystal-clear evidence that the 
employer has not made a binding promise. And in some cases, some judges 
might treat the summary plan description as a plan document and find it 
significant that the description did not alert employees to the fact 
that the employer could change the plan, or drop the plan. And in other 
cases, some judges might hold that the employer violated fiduciary 
rules if it lied about benefits and employees reasonably relied upon 
the employer's misrepresentations.
    We know that in a real work environment, rather than the imagined 
work environment conjured up by the judges in Sprague, employees tend 
to believe communications--oral and written--that they receive from 
their managers. They do not hire sophisticated lawyers to review plan 
documents and render opinions to them at $500 per hour on whether 
incomprehensible legalese buried deep within a plan trumps what 
otherwise appear to be clear promises.
    So what should Congress do? Several people have suggested that it 
do nothing, but doing nothing means that retirees cannot rely on what 
appear to be clear promises and courts will occasionally rule for 
employees but more often will not. As Bill Payne, a lawyer who has 
litigated many retiree health care cases, has suggested, the outcome 
will often be foreordained by the ideological predisposition of the 
judges hearing a case rather than by the actual facts of the case.
    Congress could try to level the playing field for employees with 
clear, reasonable, and consistent rules to guide judges who must 
determine whether the employer has made a promise to its employees. Or 
Congress might say that plans can be modified by clear written and oral 
representations even if not embodied in the actual written formal plan 
document. Or Congress might consider legislation such as that 
introduced by Congressman Tierney that would make it difficult or 
perhaps impossible for an employer to terminate retiree health benefits 
after an employee has retired. Or Congress might try to help all older 
Americans have access to decent and affordable health care, not just 
those who were fortunate enough to have an employer who promised such 
benefits and fortunate enough to be assigned a federal judge who 
believes that promises made should be promises kept.
                                 ______
                                 
    Mr. Tierney. I thank all of you for your testimony. We 
appreciate it. It gives us plenty of food for thought. We are 
going to go into our questions here and we will give each 
member 5 minutes for the questions and responses and try to 
give people an opportunity to go again if we have time.
    I understand, Mr. Lillie, if there were any questions 
concerning the contract or some legal matters that you would 
like to consult your attorney before answering those. Mr. Kline 
has said that if that's the case, you can certainly turn and 
get some clarification from your counsel if you want. I am not 
sure anyone is going to ask you any particular legal questions. 
They might ask you some particulars about your personal 
experience on that.
    Mr. Macey, you raised the objections that we hear to this 
remedy from time to time, but after hearing Mr. Lillie and 
listening to Professor Stein and Mr. Jones, how can you 
continue to say that employers are not breaking their promise, 
that we have targeted the wrong remedy here? We all understand 
that the health care system at large needs some attention. This 
is a situation where clearly there at least seems some evidence 
where employers have indicated a coverage, and then at some 
point, taken a different path. How do you still maintain that 
this is a situation where employers are keeping their promises?
    Mr. Macey. Well, I agree with Professor Stein's statement 
that this is primarily a matter of contract law, so I would 
want to understand what the contract does. And ERISA also 
provides that you need to communicate things in a summary plan 
description and in other documents. And in fact, some of the 
cases have--more recent cases not necessarily with retiree 
health but with benefits in general have involved that the 
courts say if there is a conflict between what you tell people 
and the plan, what you tell people will be enforced. So if you 
have an SD that says one thing and a plan that says another you 
can't--an employer can't just rely on the plan document. Also 
you have to look at the SPD. I would also----
    Mr. Tierney. Excuse me. But that hasn't worked out too 
well, though, has it? Professor Stein, isn't that exactly what 
happened to GM? They had one document and then a series of 
other documents that said exactly the opposite, and the court 
said it doesn't matter what they told you most recently, we are 
going back to the original thing you saw when you were hired 26 
years ago and why didn't you remember it?
    Mr. Stein. Yes. In some ways I agree with Scott that it is 
not necessarily a problem with the statute; it is a problem 
with the way the statute is being interpreted by judges. And 
there is a lot of scholarly literature on this on a variety of 
topic but judges sometimes provide very different contract 
principles when dealing with employer-employee relations then 
when they are dealing with other types of contractual 
relationships. And I think what we are seeing in this area is 
an example of that kind of an approach to looking at contracts.
    Mr. Tierney. As much as we are looking at contracts, I 
think we are also looking at equity, in that there are estoppel 
principles that flow in and otherwise. But let me ask some of 
the other witnesses their response to a point that Mr. Macey 
raises, that if you require employers who are profitable, who 
have made this promise to maintain it during the lifetime of 
somebody's retirement, then all hell is going to break loose, 
everybody is going to loose their health insurance and it is 
going to be the end of the picture.
    Mr. Jones, what do you say that to that argument?
    Mr. Jones. I think history tells you that this hasn't 
happened, that people who did not know about the reservation of 
rights clause, especially the part of termination of benefits 
or reductions of benefits have not been protected. Time and 
time again, Mr. Kadereit came from Lucent and you know what 
happened to the Lucent people. I came from Nynex and now 
Verizon. I know what has happened there. It goes on and on. I 
don't understand. In fact, this is news to me that if you have 
a document that says one thing and you have been told something 
else, that is exactly what happened to all of us, and we are 
all suffering the consequences. So this is a problem with the 
legal system.
    Mr. Tierney. Mr. Kadereit.
    Mr. Kadereit. First of all, I believe that all the damage 
occurred between 1990 and '93 and not in the '90s, as I believe 
someone said earlier, because FASB was announced in '90 to be 
effective in '93. Between that period of time companies raced 
like the devil to put caps in so they could profit from that 
and those caps limited at that period of time benefits.
    As to the question of the interpretation agreements, I 
think the classic case we have before us is the EEOC rule. The 
EEOC rule was wedged in on the promise that retirees under age 
65 would lose their benefits if they weren't able to dump 
everyone else under the bus over age 65. However, if you 
examine the construct of that rule or any other verbal or 
written agreement, you will find there are absolutely no 
guarantees for anyone under age 65. So the test will be--and it 
has already begun to happen. Lucent has already taken advantage 
of the EEOC rule and reduced its health care benefits for 
prescription drugs for people under 65.
    The point I would make, sir, is that there are no 
guarantees and in the absence of any guarantees there will--the 
behavior will run toward profitability and not toward what our 
people are being told, and that is that they are legacy.
    Mr. Tierney. Thank you.
    Mr. Kline.
    Mr. Macey. Mr. Chairman, can I possibly comment upon a few 
of these?
    Mr. Tierney. If Mr. Kline would like you to do so, 
certainly.
    Mr. Kline. Thank you, Mr. Chairman.
    Yes, you may, Mr. Macey.
    Mr. Macey. Thank you so much. Some of the companies we talk 
about they are verged on financial failure. So it is not like 
they are wreaking huge profits and returning some great return 
to shareholders. One of the companies you mentioned has been in 
significant financial difficulties probably, as you know, for 
many years. And what happened was when some of these--when 
decisions were made to offer these benefits many years ago, 
they were very--the cost of the benefits and the treatments and 
technologies available were much different than they are now.
    So I don't think any company made an unconditional promise. 
I am not aware of companies that made these unconditional 
promises that they would provide for life, whatever health care 
evolved into. I would want to look and see with each company, 
each one of the ones that have been mentioned either in the 
testimony or otherwise or that we all know about, and I do hope 
these decisions have been taken very seriously by companies and 
the ones I have worked with they certainly have been--have not 
been taken lightly. But was a commitment made, for instance, to 
provide health coverage based upon what the costs were in 1985? 
Well, if that is the case the costs might be $1,000 per person 
or $2,000 per person and not $12,000 or $10,000 per person. So 
these are very, very complicated issues, and I actually have 
anecdotally in my own family--my brother has incurred exactly 
what the other witnesses have testified about today, but this 
bill wouldn't have helped him at all. He worked for a company, 
actually headed up a very small landscaping and tree surgery 
company for many years, 40 years, and he sold it off to one of 
his employees. He was a great employee, but turned out to be a 
bad business person and ran the company into the ground.
    And my brother was supposed to get health insurance until 
he was Medicare eligible. Well, he lost that insurance at age 
62, and at age 63 he had a massive heart attack and cardiac 
arrest and was in a coma for approximately a month. Now thank 
God he is in great shape now physically and we have managed to 
work ourselves through $500,000 of uninsured health costs. 
First of all, we negotiated down to $100,000 with some family 
help and with his own personal retirement savings he was able 
to pull that off and not lose his house. But this bill wouldn't 
help him at all. That is why among other reasons we are saying 
this is a societal more comprehensive problem, not one just to 
impose a focus or a select tax on a few companies that are 
trying to do the right thing.
    Mr. Kline. Thank you.
    Mr. Kadereit. May I make a comment?
    Mr. Kline. No. Sorry. I am rapidly running out of time here 
and while it was demonstrated that I would not come down there 
and rap you with a hammer, I am not so comfortable sitting next 
to the chairman if I run overtime.
    Let me just say very briefly that I think what Professor 
Stein has said and Mr. Macey about what and how benefits are 
communicated is extremely important, and I would also say that 
it is extremely important that when we write law, when we make 
statute, that we write it as clearly and unambiguously as we 
can and not rely on, as one of my colleagues famously said, 
attorney world to sort it out. We need to make it clear. And in 
this case, it seems to me that, leaving out the legal matters 
in front of us, that we have a case where something was 
communicated, went to court, the court ruled in favor of the 
employees and now it is under appeal and the attorneys are 
staying busy.
    So Professor Stein, you had a pretty interesting suggestion 
I thought that if Congress were going to do something, we might 
want to clarify what prevails over what in terms of the 
communications that have been put forward and I would hope that 
would be one of the things that we would look at. I still 
remain very concerned and this is the reason I am sorry I cut 
you off. The light was about to turn red. I really did want to 
hear about some of the concerns from Mr. Yamamoto and Mr. Macey 
about what would happen if you put a mandate in, what would 
happen potentially to the voluntary retirement system, but I 
see that my time is about gone and you still have--then let me 
ask that of Mr. Macey. If we put this mandate in, Mr. Tierney's 
1322, what do you suspect would happen with this voluntary 
system?
    Mr. Macey. I think companies when they look at an unknown 
future cost and price volatility that they would be--that would 
be imposed upon them, I think a lot of them, the overwhelming 
majority, will terminate their plans for future retirees, for 
the active employees now. So we will be creating a worse 
situation that we are going to have to deal with in the future 
for all of those employees.
    Mr. Kline. Thank you very much, Mr. Chairman.
    Mr. Lillie. Mr. Chairman, could I say something, please?
    Mr. Tierney. Actually you may, but with the chairman's 
prerogative, you have 1 minute. Go ahead.
    Mr. Lillie. I am not an attorney. I am just a plain old 
retired tool and die maker.
    Mr. Tierney. You are chewing up your 1 minute.
    Mr. Lillie. And I have seen a lot of people suffer. 
Raytheon is not in any state of duress. Believe me. There are 
billions and billions of dollars of contracts, and yet they are 
reneging on their contractual language with that they bought 
into when they bought Hughes, and they are reneging on that, 
and we have got an awful of people that are really suffering. 
Their whole lives they have worked towards their retirement to 
enjoy it and now it is going down the tubes.
    Mr. Tierney. That is a point well taken, Mr. Lillie, and I 
do note that 1322 at least deals with profitable companies.
    Mr. Lillie. Yes.
    Mr. Tierney. And provides for a waiver if a situation is in 
distress, and provides for a guarantee for loans if they need 
to have some assistance in maintaining their promise.
    Mr. Lillie. Could I ask one more thing, sir? I am 
witnessing something here that I mean--like I say, I don't know 
anything about how things are done up here, but I understand 
Democrats are over here, Republicans are over here. Is that 
correct?
    Mr. Tierney. So far so good.
    Mr. Lillie. So am I to believe that the Republicans that 
haven't showed up don't care about us retirees?
    Mr. Tierney. Not at all. Not at all.
    Mr. Kline. Mr. Chairman.
    Mr. Tierney. Mr. Kline, I will take care of this. Any 
members not being here is not indicative of lack of interest at 
all. Everybody has an opportunity to read all the testimony, 
and will read all of your written testimony and the results 
here today. We have a lot going on down here. Members have 
multiple subcommittees and committees and action on the floor. 
They have a whole host of responsibilities. They have staff 
members here monitoring the hearings as well.
    We have a big financial crisis that Mr. Macey referred to 
earlier that we are all involved with right now. We have 
continuing resolutions to try to carry our financing through 
the end of the year and the next election. We have a stimulus 
issue going forward. There is a lot going on, and all these 
members have multiple responsibilities, and whether they are 
here or not--and some will come, stay as long as they can and 
leave, and may come back. It is not at all an indication of 
lack of interest. That would be unfair to even indicate that.
    Mr. Lillie. Thank you.
    Mr. Tierney. Okay, Mr. Andrews, you are recognized for 5 
minutes.
    Mr. Andrews. Thank you, Mr. Chairman. Thank you, ladies and 
gentlemen. I find this hearing to be fraught with irony. The 
issue that is riveting this Capitol today is the value of 
keeping a promise. Last night, the President of the United 
States went on television and talked about the promise that we 
receive when we put our money in a bank, that we ought to be 
sure that it is honored. And he said, talking about the FDIC, 
the keeper of that promise, the guarantor of that promise, the 
FDIC has been in existence for 75 years, and no one has ever 
lost a penny on an insured deposit, and this will not change.
    I agree with the President on that. But tens of thousands 
of people at Raytheon and General Motors and other companies 
relied on a promise that if they went to work and if they 
followed the rules when they went to work that they would have 
great health care for the rest of their lives. And we are 
having a hearing about whether that promise means something 
under the law or whether it doesn't. I think it needs to mean a 
lot under the law. I want to, Mr. Macey, welcome you back to 
the committee and ask you about this. On page 4 of your 
statement, you say that courts have ruled repeatedly that an 
employer may not change the benefits of a retired worker unless 
written plan documents reserve the employer's right to amend or 
terminate the post-retirement benefits, and, the employer 
communicates these rights to its workers clearly and 
unequivocally before they retire.
    How do you reconcile that, though, with the Sprague v. 
General Motors case where, in fact, General Motors not only 
didn't warn workers that they could be losing these benefits 
after they retired, they said exactly the opposite. In 
communication after communication, they said these are lifetime 
retirement benefits. So is your description of the law 
inaccurate?
    Mr. Macey. No, I don't think it is. One, that case, if I 
recall correctly, dates from about 10 years ago. And it had 
kind of a torturous history up and down the court system. And I 
apologize, but I don't recall all the details, the factual 
details of----
    Mr. Andrews. Well, isn't the important detail that General 
Motors won, that the retirees didn't get their benefits?
    Mr. Macey. I want to go back and read the final decision. I 
think there were several appellate court decisions and two or 
three district court decisions.
    Mr. Andrews. But the final en banc decision was that 
General Motors won and the employees lost.
    Mr. Macey. No, I know the result. I don't know--I haven't 
read the case recently to know the reasoning behind it. I know 
there are lots of cases out there, and the Federal courts are 
strewn with cases both for participants and for employers that 
generally are very factual specific cases. It depends on the 
specific facts. But I think you are raising, regardless of all 
these cases and whether or not judges are making decisions 
ideologically instead of based on the law and the facts, which 
they should, you are raising an important issue. And that is 
communications. What have participants been told and what can 
they reasonably, what are reasonable expectations based upon 
what they have been told? And Professor Stein and I were 
talking before the hearing this morning about maybe the 
Department of Labor, which does have a project underway as to 
statements that are supposed to be made to participants in 
401(k) plans about the fees that their accounts are paying, 
maybe they should have a project underway on this issue. If a 
company says----
    Mr. Andrews. Yeah.
    Mr. Macey [continuing]. We have a reserved right----
    Mr. Andrews. If I may, though, I don't think the problem 
here has been the ambiguity of the statements made by employers 
to retirees and workers. I think it has been their disregard of 
those statements. I think that the common thread throughout 
these cases is that there is not a factual dispute as to 
whether or not the employer promised lifetime health benefits.
    There is a legal dispute over whether that promise is 
overridden by a unilateral decision in the plan documents. So 
isn't Mr. Tierney's legislation headed in the right direction 
where it resolves that dispute and essentially says as a matter 
of public policy you can't do that? You can't make a series of 
representations which are contrary to the legal position that 
you later take? Isn't that sort of a basic in contract law?
    Mr. Macey. I agree with that final statement, but I guess I 
respectfully disagree with your characterization of what the 
issue is. I think it does come down to, one, contract, and two, 
what you tell people. And if an SPD says here is the benefit we 
currently provide, but we reserve the right to change it or 
terminate the plan entirely, to me that is--they have a legal 
right that this bill would----
    Mr. Andrews. My time is almost up, but I would just like to 
close with two things. I would invite Mr. Macey, with the 
record being left open, for you to submit to the committee any 
cases where the statements by the employer were ambiguous with 
respect to this where the employer won. And second, echoing 
something the chairman said, the chairman's bill specifically 
provides a waiver for a company that would meet financial 
distress because of honoring this promise to apply to the 
Department of Labor and be relieved of its obligation. So this 
argument that somehow this would impair the solvency of 
corporations if they had to honor these promises is dealt with 
in the underlying legislation. Thank you.
    Mr. Tierney. Thank you, Mr. Andrews. Mr. Wilson.
    Mr. Wilson. Thank you, Mr. Chairman, and thank you all for 
being here today on the very important issue of safeguarding 
retiree health benefits. Mr. Yamamoto, in reviewing your 
testimony, I have a concern about the restrictions on company 
prefunding of retiree health benefits. Can you tell us are 
there any proposals that would responsibly change these rules 
to encourage the offering of retiree benefits?
    Mr. Yamamoto. Yeah, back in 1984, like I mentioned, the 
Deficit Reduction Act of 1984 limited the amount of money that 
an employer can put into what is called a Voluntary Employees 
Beneficiary Association, a 501(c)9 trust fund. What that did is 
there is the mismatch between the accounting requirements now 
that was adopted a little bit later, in 1990, versus what can 
be funded into a trust fund. So there is not a lot of incentive 
for an employer to match the accounting requirement that they 
have to expense on their financial statements to what they can 
actually set aside on a tax effective basis.
    So that is probably the key limitation there. I have 
worked--I have to admit, I have worked with several employers 
that have tried to come up with that through different funding 
vehicles, you know, beyond just this one trust vehicle that is 
out there. But it is difficult to do.
    Mr. Wilson. Well, in the legislation before us is there a 
way to amend it in such a way that this could be helpful?
    Mr. Yamamoto. It would be eliminating a lot of limitations 
that are currently in the laws for VEBAs.
    Mr. Wilson. Well, as we all share an interest in this, I 
hope we can look at that potential. Mr. Macey, in your 
experience, what specific types of changes have employers made 
post-retirement to retiree benefit plans? Have these changes 
permitted employers to continue to offer retiree benefits?
    Mr. Macey. I think, you know, other than very financially 
distressed or bankrupt companies, the ones that I am familiar 
with and have dealt with have not terminated the plans 
outright. I think developing networks so that people get a 
better deal on copayments and deductibles if they use a network 
operation rather than just a total free standing, free choice 
program. Additional copays and some rise in deductibles. I can 
remember back in the 1970s, I think I had a very rich plan for 
a while, and I had a deductible of $100. And it seems like that 
would be extremely unrealistic to have $100 deductible in 
today's environment.
    So changes like that increases in the premium. Sometimes 
the caps that were mentioned so that the employer says we will 
cover the premium cost, the coverage cost up to some level, and 
then above that the increases, meaning what really happens is 
they usually set that level somewhat below the current cost, 
and then as health care inflation continues, it rises above 
that cost and the employees and retirees then are assuming the 
burden of health care inflation. And one of the points I was 
making in my testimony is that if you have health care 
inflation at 10 or 12 or 15 percent year after year, no company 
can assume that type of burden and doesn't assume it with 
respect to anything else it does business with.
    Mr. Wilson. And I appreciate that explanation. 
Additionally, I am really hopeful that employers can find out 
what duties they have, also employees, what rights they have. 
Can you elaborate in your testimony how current law adequately 
protects retirees?
    Mr. Macey. Well, I think the cases basically say if a 
company has promised to employees a lifetime unchanged benefit, 
and I say both lifetime and unchanged, and hasn't also clearly 
said that that is what you get now, but we have the right to 
change that in the future, the courts uphold that promise.
    Now, I think the cases where companies have made that type 
of unconditional promise you will see much more frequently in 
collectively bargained plans, where they are dealing with a 
union and the union is pushing back on them. And so the courts, 
especially in the sixth circuit, where a lot of these cases 
came out of Ohio and Michigan and places like that, a lot of 
the old manufacturing companies, the courts have upheld those 
type of commitments and told the companies they had to continue 
to provide the benefit.
    Mr. Wilson. Thank you all very much.
    Mr. Tierney. Thank you, Mr. Wilson. Mr. Sarbanes?
    Mr. Sarbanes. Thank you, Mr. Chairman. I think it is a 
terrific bill that you have authored. I don't think I have 
heard any meaningful objection to it offered. And I also want 
to endorse the comments of Representative Andrews. I am kind of 
curious about the whole FASB thing. You talked about between 
1990 and 1993, as people rushed to get these obligations off 
their books. Well, let me ask you, Mr. Stein, Professor Stein, 
do you think that attorneys for these companies would have been 
advising the companies that if they went ahead and in 
compliance with the new FASB rules showed the obligations on 
their balance sheets that that would have been a concession of 
some sort of contractual obligation to actually follow through 
with those, or do you think that is, in effect, what was 
operating to make them pull these things off the books?
    Mr. Stein. I think it was complex, and a lot of things were 
going on. But I think the change in FASB really affected 
employers that were saying, you know, gosh, I now have to show 
these benefits as if--you know, at their value, as if they are 
real.
    Mr. Sarbanes. As if they are real, meaning all along maybe 
they never thought they were real, right?
    Mr. Stein. Well, I think what Scott said is true. I think 
they thought they were real. I think they didn't appreciate 
what the promise might mean in a changed kind of medical 
environment, where health costs have outpaced inflation. But 
you know, generally we don't tell people that you can change 
your contract because the world didn't turn out the way the 
parties had thought when they negotiated the contract. And I 
also think that Scott's right, I mean, this is a very serious 
problem with respect to individual employees, and in particular 
companies, but the problem is a societal one.
    In some ways I don't think whether you get decent care 
should sort of depend on whether your employer happened to be 
generous, and then whether you find a judge who is willing to 
enforce the promise that the employer made that--I mean this is 
a global problem. This is a subset of a very large problem.
    Mr. Sarbanes. Well, the hearing obviously points up the 
overall defects in the----
    Mr. Stein. Yeah, one of the real problems, and this may be 
unfair because I am using your question to make a different 
point, but you know there is a provision in ERISA which courts 
like the Sprague court really latched on to, which said that 
there has to be a written plan. That was put in ERISA to 
protect employees to make sure there was a written plan. And 
what courts have done is sort of turned that around and said if 
it is not in the written plan document itself, which few 
employees ever get their hands on, it doesn't matter.
    And that essentially gives employers--I mean I hate to say 
license to lie--maybe it is license to embellish. But it does. 
It means anything you say to the employee outside the plan is 
irrelevant in terms of what happens when a judge actually looks 
at the plan document itself. And most employees get their 
information from their managers. They believe it when somebody 
says, in writing especially, but also orally, these are really 
valuable benefits. They will last for your life. They can't be 
taken away. The employer is going to pay for them. That is the 
way employees really get information. But the courts pretend 
that the way the employees are getting their information is 
from this legalese-laden plan document that they never even 
see, or hardly ever see.
    Mr. Sarbanes. And Mr. Macey, that is all this bill is 
trying to do, right, is restore what a reasonable person would 
expect the bargain to have been in their interactions with the 
employer. Right?
    Mr. Macey. Well, I guess it is based upon an assumption of 
what reasonable expectations are. But that is so 
individualized, both with respect to the milieu of the company 
and what it said and the plan and so forth, the conditions and 
the environment, as well as what, you know, what the individual 
knew. And I do agree with what Professor Stein mentioned, some 
people do get their information on plans from managers rather 
than from benefit personnel or from the plan documents and the 
summary plan descriptions and things like that.
    Many companies put in their communications documents that 
if you have issues or questions or communications about the 
plan, please come to the benefit department, not your manager, 
because the manager doesn't speak for the plan itself. They are 
not involved in the administration or interpretation of the 
plan.
    Mr. Stein. Of course in GM, you had documents that were 
being prepared by the Human Resources Department that made the 
same statements that were being made by managers. And those 
didn't really mean anything either because, you know, you had 
this thing in the plan which nobody saw saying the employer can 
change the program if it wants.
    Mr. Sarbanes. Right. A good place to end. Thank you.
    Mr. Tierney. Mr. Kildee.
    Mr. Kildee. Thank you very much, Mr. Chairman. First of 
all, under full disclosure, I have to admit that I am cosponsor 
of this bill, so I am not exactly impartial. Mr. Lillie, your 
pension and your health care benefits, to my mind, belong to 
you. Like my dad, when he went to work and you went to work, he 
agreed to take so much money each week for his labors there and 
then defer some of his earnings for later in life, for a 
pension or for health care. And that was considered absolutely 
an absolute, that he took immediate wages and deferred wages. 
So the health care benefits and the pension are not a gift from 
the corporation. It is really your money.
    It is money you worked for. You know, for a wedding you 
send a thank you note for a gift. You never send a thank you 
note to the company for their retirement benefits or for their 
health care. And I think we have to really institutionalize in 
our society, as long as we have the health care systems, and 
they are systems we have now, we have to institutionalize the 
fact that these things are really earnings that you agreed to 
defer rather than take home in your weekly paycheck. Would you 
agree to that concept?
    Mr. Lillie. Absolutely.
    Mr. Kildee. And that was pretty well your thought as you 
worked every day when you went in and did your work as a tool 
and die maker, right?
    Mr. Lillie. Absolutely.
    Mr. Kildee. Took so much home and so much later.
    Mr. Lillie. It was negotiated as part of your wages.
    Mr. Kildee. And I believe that. I believe that strongly. My 
dad worked for General Motors from 1916 to 1950. And he took 
money home regularly, but also had deferred wages. And that was 
true of most everyone in Flint, Michigan. I come from Flint, 
Michigan, where General Motors was established, where D.D. 
Buick and Louis Chevrolet and Walter Chrysler. He was chief 
engineer for Buick before he founded his own company. But the 
people there pretty well, they didn't think this was a gift, 
they never sent a thank you note, you know, to Harlow Curtis or 
any of the presidents or the CEO for the nice gift you sent me. 
They figured this was my money. And you feel this was your 
earnings, did you not?
    Mr. Lillie. I agree wholeheartedly.
    Mr. Kildee. And I think, Mr. Chairman, that is why I am 
cosponsor of this bill. Somehow we have to institutionalize 
that concept. And I yield back the balance of my time.
    Mr. Tierney. Thank you, Mr. Kildee.
    Mr. Lillie. Mr. Chairman, as part of my answer to Mr. 
Kildee----
    Mr. Tierney. Sure. You are better than most at this. I have 
to hand it to you.
    Mr. Lillie. I tell you what, my heart is so much into this. 
I have to say my piece. I am sorry.
    Mr. Tierney. I understand, but the way we usually do it 
here is people ask questions and the members on the panel 
answer, so I am going to give you 1 minute again, sir.
    Mr. Lillie. Okay. All I am asking now, in light of Mr. 
Macey's comment about how case law requires that employers 
honor their promises, why is it that the employees of Raytheon, 
we have had to file suit to get ours?
    Mr. Tierney. Thank you. Mrs. McCarthy.
    Mrs. McCarthy. Thank you, Mr. Chairman, and thank you for 
having this hearing. I want to go back to Professor Stein. My 
colleague, Mr. Andrews, started to hit upon with you on an 
explanation. And I am not a lawyer, so this is going to be a 
little bit more out of my league. But in your testimony, I 
remember hearing you say that, you know, maybe we need to look 
at how we can modify by clear written oral representation. And 
yet with my small knowledge of law, I thought that there has 
been a clear precedent in most court cases that there is a 
legal precedent, that is the word, to include oral statements 
when looking at terms that are part of a binding contract. 
Because one of the things that bothers me, and I see this in 
corporations unfortunately all over the country now, Mr. Lillie 
worked for the company for a lot of years. 40 years?
    Mr. Lillie. 36.
    Mrs. McCarthy. And a promise was made to him. And yes, 
health care costs have gone up, we understand that. So it has 
become more and more difficult. But when you are talking about 
our seniors that have put their years into a company, they knew 
how much money they had for a pension, they probably figured 
out what they were going to be getting for Social Security, and 
adding those things up, what else he might have saved. And then 
to have his health care insurance go up to $500 a month, to be 
very honest with you, that is not right. And that to me, if 
anything, that should be a criminal charge to a certain extent 
to the company that promised him something. But if you could 
answer my first part of my question, I would appreciate that.
    Mr. Stein. Well, the law has been around for a long time. 
And it has never been--the one thing you can say about it is it 
has never been really clear. All right. Everything about the 
law is almost always on the table. And in the area of 
contracts, there are doctrines that say you don't go outside 
the contract, the terms of the contract unless it is--unless 
the contract itself is ambiguous.
    But you also have other cases, other rules that say if you 
have a contract that somebody then suggests that, you know, we 
will go beyond it, and they say it in a way that you are going 
to rely on, that they have to now, you know, go ahead and do 
what they said they are going to do because you relied on it. 
Under ERISA, the law that developed in this area, which is 
sometimes called estoppel, has been very unfavorable to the 
employee.
    Most of the law, at least in my view, and I know Scott 
would probably disagree with this, but in my view most of the 
law that has developed, not all of it, but most of it has 
reflected a view, essentially, that somehow a contract between 
an employer and employee is different than other kinds of 
contracts, and that the employer needs to be given prerogatives 
that wouldn't be given to other contracting parties in 
different contexts. And I think this that has been a very 
serious problem.
    And one of the areas I think that is true is this idea that 
this written plan requirement, which was done to protect 
employees, has become a shield for employers to use against 
employees trying to enforce clear promises that the employer 
benefited from. All right? The employer gets loyal employees 
who work harder because they think that their employer is 
giving them benefits. And you know, I cut this out of my 
testimony even though I like the sentence, but, you know, if 
you read the Sprague case, what an employee should do when they 
take a job is get all the documents, hire a lawyer at $500 an 
hour, and then have the lawyer write a written opinion about 
whether they could rely on the statement that the employer made 
that these are lifetime benefits.
    And I will tell you it would take a lawyer like Scott or me 
a number of hours to give an opinion, and we would probably 
hedge a little bit. And there was a book in 1928, I think, by 
this guy Alfred Conant, who wrote about pensions and health 
care, and he called these clauses back then, I mean, he didn't 
make up the name, back then these reservation of rights clauses 
were referred to as weasel clauses. And I think that is a 
pretty accurate description.
    Mr. Jones. Mr. Chairman, can I also respond to Mrs. 
McCarthy?
    Mrs. McCarthy. Sure.
    Mr. Tierney. It is Mrs. McCarthy's time, sure.
    Mr. Jones. I think what we have to understand here is this 
isn't just one commitment that was made to employees. When you 
decide to join a company, you listen to the benefits that you 
would get, your salary that you would get, and all the other 
things, and then possible chances for promotion or whatever. 
And you make a decision based upon what you are told. And you 
would decide one company over another based upon this package, 
whatever it is. I have done that. Somewhere along your career 
you look out there and you see some things that maybe look very 
attractive to you, and you start getting into them, and you 
have to make another decision, am I going to stay here or am I 
going to move onto another company?
    You say well, wait a minute now, I have got these lifetime 
health care benefits. You can't forget those. If I jump ship 
now, I am going to lose all of that. So we stay. Now it comes 
to am I going to retire or not early? As you know, many, many 
people are retiring earlier and earlier. And you have that 
decision again. And you look at it and say, well, can I afford 
to retire now? I can figure out what my pension is, I can 
figure out pretty close what my Social Security will be, I know 
what I have in savings, and I know I am going to have lifetime 
health care, I can afford to leave. And you leave. And then a 
year or 2 later you lose your health care component.
    Now, this is unconscionable, frankly, in my opinion. And 
however we attack this problem, we have to know when a person 
retires what they are entitled to. They should know exactly 
what they are entitled to, whatever it is. And frankly, if the 
answer is I am sorry, Mr. Jones, but----
    Mrs. McCarthy. It is called transparency.
    Mr. Jones [continuing]. We may just have to terminate your 
plan downstream here, so you better not count on it, at least I 
know when I walk out the door if I can count on it or not. And 
I think that is an extremely important point that I wanted to 
make.
    Mr. Tierney. Thank you, Mr. Jones. Thank you, Ms. McCarthy. 
Mr. Hare.
    Mr. Hare. Thank you, Mr. Chairman. I just, in listening to 
this, I am amazed. You know, I was brought up that a promise is 
a promise, if you gave somebody your word, your word was your 
bond. I am just taken back. I am just wondering if the CEOs of 
these corporations that are taking away the health care 
benefits, these are some people who probably make as much in 2 
weeks as their employees make in a year. The other problem that 
I have is these employees whose health care is being taken away 
from them, they made the money for this company. They made the 
company what the company is. Without them, you know, these are 
the people who go to work every single day.
    And I have to tell you, when--you can go to court and do 
all these other things, but if you promise somebody that they 
are going to have health care, and that health care is going to 
cover them, people like Mr. Lillie and the people that he 
represents, ordinary people, to pull the rug out from 
underneath them, if it is not illegal, it is certainly immoral 
from my perspective. They count on this. And to have to go hat 
in hand, I am, you know, amazed.
    I think that is why--and I totally support the chairman's 
bill on this. And you know, we can go to court and we can tie 
this thing up, but either you care about the people who put 
their lives in and their families for the corporation or you 
don't. Don't make it if you are not going to keep it. I want to 
ask Mr. Jones this: How many retirees have been affected by 
cuts and terminations of company-sponsored health care 
benefits? Do you have any idea how many people we are talking 
about?
    Mr. Jones. Well, there are about 20 million retirees out 
there who would be subject to cuts. And I would say that 
probably most of them have suffered some reduction in their 
health care benefits since they retired. But probably about--
estimate is about 4 million of them have had very serious 
consequences, either total termination of the plan or very 
serious cuts.
    Mr. Hare. Four million.
    Mr. Jones. Four million.
    Mr. Hare. And that is not including affecting their 
families, so that 4 million is really----
    Mr. Jones. Absolutely. And all their beneficiaries. But you 
know, there is also more retirees retiring every day, and there 
are more companies reducing or terminating health care every 
day. So eventually, if nothing is done about that, I would say 
the whole 20 million will be on the block.
    Mr. Hare. Do you have any idea how many companies have 
reduced or terminated health care benefits for their employees?
    Mr. Jones. Well, of course, we have heard about General 
Motors and we have heard about Embarq recently. We have heard 
about what has happened to Lucent and others. There are plenty 
of large companies that have terminated those plans.
    Mr. Hare. Maybe just for the panel, I have John Deere's 
corporate headquarters in my district. And the management 
retirees, they changed the health care plan. They showed me a 
paragraph. And in the paragraph it said you are going to get 
this voucher to get health care. And you will have every single 
thing that you have now, you will be able to purchase. So 
management retirees are thinking not a bad deal here. They went 
out and found out that they could not purchase prescription 
drug medicines and things of that nature because it was cost 
prohibitive for them to do it.
    Now, I am not the sharpest knife in the box here, but if it 
says we are going to give you a voucher that will give you what 
you had, exactly what you had before we terminated this, and 
you can't go out and purchase the policy that you had, can 
somebody explain to me where they went wrong here? Because I 
have these folks coming into my office saying my wife has got 
diabetes, or we have these different problems, we need these 
prescription drugs, we used to get them under our health care 
plan, I worked 34 years for Deere, and now I can't get them.
    Mr. Jones. It sounds like theft to me.
    Mr. Macey. I guess I don't know the specific situation, but 
there is a rule in ERISA that has been endorsed by the Supreme 
Court. That is, under the fiduciary provisions of ERISA, 
communications are considered, when you talk about the plan, 
they are considered in general terms to be a fiduciary 
function. And the Supreme Court says you can't lie to your 
employees. So companies have been held liable at the Supreme 
Court level for making intentional misstatements and misleading 
representations to employees. And that is under current law. 
The biggest thing about this bill is all the employers that--
forget--I mean, I know you can't forget, I know individuals 
can't forget, and I am empathetic with it, I think something 
needs to be done about it, I am certainly sympathetic to the 
Raytheon and General Motors and Deere retirees and employees, 
and I agree with the statements that these are the people that 
built the company.
    And one of the written statements mentioned that these are 
the people that made America great. And I agree with all of 
that. I think we all agree there is a real problem here. It is 
trying to--we can bash a bunch of companies and say, you know--
and regardless of what they said, there is a lot of good actors 
out there that were trying to do the right thing, that were 
providing retiree health benefits all these years and either 
ran into financial problems and they had to start charging some 
premiums. They didn't go out and terminate their plans.
    They had to start charging some premiums or copayments or 
things like that. You know, if we are focused--not necessarily, 
I don't know enough about these specific companies to know 
whether they are bad actors or not. But this bill here throws 
everybody into a single pot, says you are all bad actors, and 
regardless of whether or not you tried to live within the rules 
and you made some changes along the way, we are going to 
retroactively go back and change the deal that you might have 
made with your employees.
    Mr. Hare. My time is up, but let me just say, with all due 
respect, that is not what this bill does. What this bill does 
from my perspective, and I commend again the chairman, what 
this bill does is it makes people accountable for the promises 
that they make if that company is profitable. And let me tell 
you, I want to see Deere do well. They have had record profits. 
But when they take a form and hand it to their employees and 
tell them you are going to get this and you don't get it, then 
somebody ought to be held accountable for it.
    And so I commend the chairman. So I couldn't disagree with 
you more on what this bill does. I think it is a fair bill. And 
I think for companies that make the money, they ought to live 
up to the promises that they make.
    Mr. Macey. Well, I am sympathetic with what you are saying, 
but the bill itself says----
    Mr. Tierney. Mr. Macey, I am going to just answer you, you 
can talk about my bill all you want, but I would prefer that 
you get it right.
    Mr. Macey. Well, Mr. Chairman, with all due respect, the 
bill says regardless of what the plan and communications said, 
they have to restore the benefits. That to me seems to say it 
doesn't matter----
    Mr. Tierney. It also indicates they have to be profitable, 
and there is a way for a waiver if they have any of the 
difficulties that you portend, let some of these people to do 
it. Ms. Woolsey.
    Ms. Woolsey. Thank you, Mr. Chairman. Actually, we do need 
to do something about it. And it is, I think, the 
unconscionable act here is this wealthy Nation does not provide 
health care coverage to our entire population. I mean, we have 
47 million uninsured. Six million of those uninsured are 
children. And from your testimony, increasingly the uninsured 
are retired workers who have their entire life worked to ensure 
that they will have long-term health care--I mean, not long-
term coverage, but health care for their entire lives. We have 
to do something about that.
    We need a universal health care system, Mr. Chairman. We 
need to get started on this as soon as possible for the young 
and for the old, and then bring everybody else in as soon as 
possible. I would do it all tomorrow if I had my way. Mr. 
Kadereit, I have a question for you and your organization. We 
were talking about what happens to a worker who is given the 
golden handcuff. I mean, we are used to that for executives. 
But this is our working--the good working stiffs in this 
country who stay in their jobs because--and they don't take an 
opportunity to go someplace else where there might be more 
money, but they have been promised long health care benefits 
for life, so they stay in their job.
    Has your organization done any studies, can you report to 
us, can anybody, of the lost opportunities, what this has cost 
workers not only because they didn't get their promised 
benefits in the end, but what they gave up waiting for those, 
to have those benefits?
    Mr. Kadereit. Yes. I think there are numerous cases I could 
cite where that is the case. We are more concerned 
prospectively. We are more concerned that when you examine the 
history of this, there are three levels of what we would call 
take backs. One, there are the caps that were in place. You 
would think a cap would be a cap forever, but it is not. When 
prescription drugs, for example, are cancelled, the cap is 
reduced. Companies now say, oh, you don't have as many benefits 
as you had before we took some away, so we are lowering that 
cap from 500 to 700 to $400.
    And so there is an erosion of the foundation that is 
occurring that is unconscionable. It is happening purposely. 
The second level is take backs. It is the actual take back of 
that prescription drug program, or in Lucent's case, the 
Alcatel Lucent's case, they literally cancelled all dependent 
coverage because they just didn't pay dependent coverage, 
forcing every retiree out there over age 65--and keep in mind 
when we talk about retirees, it is not the one that has left 
yesterday, it is the one that has been out there for 20 years. 
And they left at $20,000 a year, which is worth about 5,000 and 
you take----
    Ms. Woolsey. Okay, I want to get to my question, so finish 
number three.
    Mr. Kadereit. So number three is when they take all the 
benefits away, which is what GM is doing.
    Ms. Woolsey. Right.
    Mr. Kadereit. When they invoke the EEOC rule, which is the 
end of the----
    Ms. Woolsey. Okay. And it is very clear these VEBAs that 
are voluntary are useless if the promises are cancelled.
    Mr. Kadereit. If there are no rules in place to limit the 
behavior, then you are not going to have any change.
    Ms. Woolsey. Okay. Mr. Lillie and Mr. Jones, Mr. Jones, you 
really answered my question about lost opportunity, but do you 
know of any way we can--I mean, that has to be used in the 
arguments against taking away benefits. Do they use this 
argument? I mean, look what each individual gave up for waiting 
for secure benefits.
    Mr. Jones. Well, I do not have a study to back this up, but 
I have to think that during a person's working lifetime of 20, 
30, or 40 years, they have given up a certain percentage of 
their pay in order to fund the benefit plans that they have 
been promised. And whatever that----
    Ms. Woolsey. That is one piece of it. The other thing is 
they may have been offered a job at another company where they 
would earn more money, but they wouldn't have had those 
benefits, so they didn't go.
    Mr. Jones. That is correct.
    Ms. Woolsey. Or they didn't have the benefits anyway, 
because what they were staying in their original company for 
disappeared.
    Mr. Jones. Well, I don't know how that would be able to be 
quantified, but I would think that it would be a substantial 
amount. We know that now when retirees now have to pay for 
their health care, we are talking even part of it, we are 
talking now 20 or 30 percent of their income now is going to 
fund this in today's market. So I can imagine over the lifetime 
of someone's career like Mr. Lillie that he has given up a 
significant portion of his money and maybe opportunity to go 
someplace elsewhere he could have made more money.
    Mr. Tierney. Thank you, Ms. Woolsey.
    Mr. Kadereit. I might add people with transferable skills 
are more likely to be affected by this. For example, a tool 
maker is in demand, is going to be able to go across the 
street. They are more likely to say I am not giving up the 
benefits package and start with a three-man company for higher 
wages.
    Ms. Woolsey. Right. So you miss the opportunity of a start-
up.
    Mr. Tierney. Thank you, Ms. Woolsey.
    Ms. Woolsey. Thank you.
    Mr. Tierney. Mr. Courtney.
    Mr. Courtney. Thank you, Mr. Chairman, for holding this 
hearing. And would note coming from the State of Connecticut, 
Aetna retirees got a pretty bitter pill when they were told 
that their dental coverage was being cancelled. And obviously 
these are people who worked in the health industry. The ironies 
of it are almost too great to even get your mind around. But I 
just want to follow up, Congressman Woolsey, talked about the 
fact that this issue is sort of in the context of a health care 
system that is in great need of reform.
    We are about 40 days away from election. One of the 
candidates, Senator McCain, has a proposal to actually make 
employer-based health benefits taxable, coupled with tax 
credits to supposedly incentivize people into the individual 
market. And one of the things the American Benefits Council by 
the way, which is a private sector trade group that evaluated 
the two candidates' positions actually came down in favor of 
Senator Obama's approach, the McCain approach being so 
incredibly disruptive in their estimation to our employment-
based system, which I thought was an interesting development. 
But I mean, has anyone looked at the McCain approach in terms 
of at least pre-65 retirees and the impact that it would have 
on people's retirement benefits if, again, those benefits were 
made taxable? Mr. Jones, Mr. Kadereit, I don't know if you had 
any comment in terms of that plan.
    Mr. Jones. Well, it certainly seems to me that we are 
heading in the wrong direction by taxing people's health care. 
People are already struggling financially. And just add a tax 
on top of a problem that we already have seems to be the wrong 
approach. I would think that you would want to incent companies 
to continue providing the health care benefits rather than tax 
those meager benefits that are still in place.
    Mr. Kadereit. You know, we prefer that companies be 
incented, if necessary, with a tax credit while we attack the 
cost, the health care cost problem. It is true that these plans 
exist, but like they say, the devil is in the details. And I 
don't know the details of either of these plans. And when you 
begin to look at the details, then you can make a better 
assumption. But a major issue is something has to be done now, 
and that the retiree universe is not the society. Our retiree 
universe is unique in that this is going to happen to them. 
They are going to lose 10 to 12 percent in disposable income 
every year. And there is a study that Kaiser Foundation just 
released that shows in 2000--year 2000, the cost for a family 
health care plan was $6,400, in 2007, $12,100.
    If caps were in place in 2000, that person would be paying 
47 percent of the health care bill in 7 years. Translate that, 
it is 39 percent erosion in disposable income. And that is the 
problem. We can't wait until Congress decides to promulgate 3 
years' worth of discussions and end up with a bill that somehow 
attacks all of society. Something has to be done to fix the 
problem for retirees. It is a unique problem. It is not a 
societal problem, except as cost is involved.
    Mr. Courtney. Well, clearly, if the Congress were to adopt 
a plan that made employment-based benefits taxable, I think 
that, you know, certainly is an issue that people need to be 
aware of, as I said, as 40 days is approaching. Another 
approach was Congressman Stark's proposal which the staff here 
circulated as part of the memo today, the Medicare Early Access 
Act, which would allow 55- to 65-year-olds buy into the 
Medicare system. Again, I just wonder if you had any comment on 
that approach.
    Mr. Kadereit. It is very important to us. As I mentioned in 
my talk, we are very supportive of Medicare access at cost even 
for people under 65. They are the people that hurt the most 
because they don't have Medicare access yet. If you retire at 
age 55 and the company pulls the rug out from under you, you 
have nothing. You must foot the whole bill, $12,000 a year. 
That is, after tax money, $12,000 a year. And if you look at 
the average retiree out there who has been out there for any 
number of years, that is over 50 percent of their income. It is 
disastrous.
    Mr. Macey. Congressman, I think that we also feel that that 
is an appropriate vehicle to look at to provide care.
    Mr. Courtney. So you don't support taxing employment-based 
benefits?
    Mr. Macey. Well, I think the issue that they are trying to 
get at is tax equity. And I believe in tax equity. I don't know 
what the right way to achieve it is in this. If you go buy a 
policy on your own----
    Mr. Courtney. It is that and decoupling health care from 
employment. That is the philosophical ideological thrust to 
this plan.
    Mr. Macey. I can tell you, though, I have personally 
thought a great deal about the issue of the individual market 
and the group market, and I do not think it is possible to 
resolve these problems or improve the health care system 
through the individual market. Okay?
    Mr. Stein. Can I just----
    Mr. Courtney. Quickly, briefly.
    Mr. Stein. I served on the ERISA Advisory Council at the 
Department of Labor for 3 years. I was in the last kind of 
class appointed by President Clinton's Secretary of Labor. And 
that group is bipartisan. And there can't be more than eight 
members from any political party. And we looked at, one of the 
projects we looked at my first year was employer-provided 
health care, and the group made a recommendation, unanimous 
recommendation that serious consideration be given to universal 
catastrophic health care as something that simplifies 
everything. All right.
    It would be a lot easier for General Motors to keep retiree 
health care if they knew they weren't going to be responsible 
for catastrophic expenses, which tend to be a problem for older 
people. And about 7 or 8 months ago, former Secretary O'Neill, 
former Secretary of the Treasury wrote an op-ed, I think it was 
in The New York Times which made the same proposal. And I think 
that is something that is worth very serious consideration. It 
doesn't solve any issue completely, but it makes dealing with 
almost every issue in the health care area a lot easier.
    Mr. Courtney. Thank you.
    Mr. Tierney. Thank you, Mr. Courtney. Mr. Kline, you have 
been very patient. Would you care to ask any further questions?
    Mr. Kline. No, Mr. Chairman, just a closing comment when it 
is time.
    Mr. Tierney. Thank you. Okay. Without objection, then I 
would like to ask just a couple questions and go on from that. 
On the FASB rule change, Mr. Yamamoto, it seems to me that 
before the FASB rule changes people were providing the health 
care to retirees, and when they retired they weren't changing 
it necessarily afterwards.
    Then the series of rules and regulations changed, and they 
had to record it on their books, and all of a sudden they 
decided they weren't going to maintain it. Nothing really 
changed except the rule and the fact they had to be more 
transparent about what their financial is, so I guess it 
affected stock price, essentially. So they decided to take that 
out. Instead of on dividends being reduced or on executive 
salaries, they decided to take it out on retirees. You want to 
correct me on that?
    Mr. Yamamoto. I guess I am not sure if it is necessarily 
taken out of retirees. I had actually consulted and worked on 
similar types of calculations probably 10 years before the FASB 
adopted the rules. And for a lot of them it is more awareness, 
if anything, of the commitments or kind of the design that was 
put together. And it makes them think a little bit more about 
the promises being made.
    Mr. Tierney. Well, your record is a lot of people thought 
about it and decided to make a change, but they grandfathered 
in existing retirees.
    Mr. Yamamoto. I am sorry?
    Mr. Tierney. Your records indicated that a lot of people 
thought about this, they made changes, but they grandfathered 
in existing retirees.
    Mr. Yamamoto. Right.
    Mr. Tierney. So that brings me to the thought that the 
right thing can be done. It is just that some profitable 
companies thought about it and said to heck with them and went 
ahead and did what the majority--the majority of companies did 
grandfather, and some decided that they were just going to be a 
bit more profitable for themselves and their shareholders and 
other stakeholders at the expense of the retirees. And I think 
that is what this bill gets at. We are not talking about 
troubled companies financially. We are not talking about not 
being able to get a waiver if you have some situation that 
comes up or whatever.
    We are talking about some public policy that when people 
retire with the reasonable expectation that they have got 
certain coverage, that not change on them afterwards. I think 
it is good public policy on that so that we know that people 
are covered on that basis or whatever.
    So that is the final point I will make on this. As a matter 
of public policy, I think this bill or something like it would 
be appropriate. I would hope my colleagues are willing to work 
with me on that. I do not think it will have the effect that 
Mr. Macey portends, that all hell is going to break loose and 
everybody is going to stop covering everybody. I think it can 
be done and people can make a reasonable expectation of what 
their responsibility is going to be, make that transparently 
known to people, and at least do that.
    I would be very curious at some point, Mr. Macey, to hear--
and I don't expect it here--but to hear what ERIC has to offer 
for these people. What would they do for the GM representative 
who had a direct representation that they were going to get 
this? What would it do for the person that has BellTel? What 
would it do for the other people around here? Nobody is arguing 
with you that the plan might have said what the plan said, 
which gave them the weasel language, whatever Professor Stein 
said, but what do you think about the people who were told 
something else and reasonably relied upon it, but these courts 
decided they are just not going to go there.
    I would like to have the discussion with you some time. I 
don't think we have time for it here today. But I have not 
heard ERIC come up with a solution and say what they are going 
to do for those people. I have heard about, oh, we have got to 
do something about health care writ large, and yeah, we all 
recognize there is a problem, but we would accept, and the 
record is going to be kept open for 5 days, if ERIC wants to 
submit some concrete suggestions of what would you do for those 
very people that we heard the testimony about today.
    Mr. Macey. We would love to have that dialogue.
    Mr. Tierney. I will leave the record open for you.
    Mr. Macey. Please don't take my criticism of the bill as 
any indication of how we feel about your ultimate objectives of 
making sure people are covered by good care.
    Mr. Tierney. No, I understand that. Thank you. Mr. Kline.
    Mr. Kline. Thank you, Mr. Chairman. I want to thank the 
witnesses for their knowledge and their passion and deep 
concern on the issue. It is evident I think to all of us, 
frankly on both sides of the aisle, that there is a problem in 
health care in general in this country. And we are probably 
going to see a paradigm shift in how we do this. It is very 
important that we work together as we go forward. And clearly 
there are retirees who are suffering in large part--for a lot 
of reasons, not the least of which is the cost of health care. 
Medical care has gone through the roof. The costs have gone out 
of control.
    So I appreciate everybody's interests today. I regret that 
we got a little partisan in here today. We try very hard not to 
do that. I appreciate the chairman's comments about why some 
members are here and some are not. I would just offer that I 
think most people in the room here, most people in America 
understand that there is a crisis, certainly a perceived crisis 
in all of our financial markets which may be affecting all of 
us very deeply.
    And so the fact that some of us may be here instead of 
working on that, I hope that doesn't imply that we are somehow 
less interested in that. As the chairman said, we are sometimes 
divided in many different directions. And I know that there are 
groups of 2 and 3 and 5 and 10 and 100 around these buildings 
trying to grapple with that very difficult situation. So thank 
you very much, Mr. Chairman. Thank you, witnesses.
    Mr. Tierney. Thank you, Mr. Kline. Thank our colleagues and 
witnesses. As previously ordered, members have 10 days to 
submit additional materials for the hearing record. Any member 
who wishes to submit follow-up questions to the witnesses 
should coordinate that with the majority staff within 10 days, 
10 business days. And I appreciate the willingness of all of 
the members of the panel to respond to those within a 
reasonable time. Thank you again for sharing your expertise and 
insight into this hearing today. And I just want you to know 
how much we really do appreciate it, and wish you all well. 
Thank you, and the meeting is adjourned.
    [Additional submissions of Mr. Tierney follow:]

                                    Silvis, IL, September 28, 2008.
Hon. John Tierney,  Rayburn House Office Bldg., Washington, DC.

    Dear Congressman Tierney: Due to short notice of the hearing, I was 
unable to attend in person. I understand that the period for submission 
for the record has also been shortened to five days after the hearing. 
Consequently, I am resorting to the FAX machine.
    The FRO organization supports HR 1322 sponsored by you. We worked 
extensively with Tim Casey in lining up Congressmen Boswell, Loebsack, 
and Braley to be co-sponsors. We also made many contacts with others in 
an attempt to rally additional support for your bill.
    Our short statement is self-explanatory and we ask you to encourage 
Chairman Miller to include it in the record of the above-mentioned 
hearing. A signed hard copy will follow.
            Sincerely yours,
                                William Gabbard, President,
                                  Flex Retirees Organization (FRO).
                                 ______
                                 

   Statement of William Gabbard, the Flex Retirees Organization (FRO)

    On January 1, 2008, Deere & Co. (John Deere) made major changes in 
health benefits for 5000 salaried non-union retirees, plus their 
spouses, who retired after 1993. (These numbers will increase as 
current employees work their way into retirement.) These changes were 
not mere ``modifications'' to employ the term Deere & Co. used in 
meetings with retirees. Certain benefits have been eliminated. Out of 
pocket maximums have been significantly increased. Other benefits have 
been cut and/or drastically restructured. This was done in spite of a 
promise made in the summary plan description (required by ERISA) that 
retirees would receive benefits ``comparable to those they had when 
working.'' This promise was also made to many prospective retirees in 
letters and other communications. In reliance thereon, the employees 
entered into retirement believing that Deere & Co. would honor that 
pledge. How mistaken they were!
    As a result of Deere & Co.'s betrayal, the Flex Retiree 
Organization (FRO) was formed and incorporated under the laws of Iowa. 
A Board of Directors was chosen and officers elected. Membership 
meetings were held in all communities where Deere & Co. has a 
concentration of retirees and other meetings are planned for the 
future. FRO has worked with Congressmen from the area. Iowa Congressmen 
Loebsack, Braley, Boswell, and Illinois Congressman Hare have signed on 
as co-sponsors of HR 1322. In short order members of FRO contributed to 
a legal defense fund, a law firm was retained, and a lawsuit was 
recently filed.
    Perversely, Deere & Co. attacked the health benefits at a time when 
Deere & Co.'s profits and executive compensation were at all-time 
highs. For example, the Wall Street Journal reported that CEO Robert 
Lane's total compensation for 2007 was $52.4 million. Deere & Co. 
selected these retirees, not because the company could not afford to 
keep its promises, but simply because they were vulnerable without the 
protection of a union contract. Deere & Co. will not share any 
information about its plans for the future. Our biggest fear is that 
over time the entire cost of retiree health benefits will be shifted to 
these retirees on fixed incomes. These savings will then drop to the 
bottom line and become available for even higher profitability and 
higher executive compensation.
                                 ______
                                 
    [Questions and their respective responses from Mr. Macey 
follow:]

                                             U.S. Congress,
                                Washington, DC, September 26, 2008.
Scott E. Macey, Senior Vice President and Director of Government 
    Affairs,
Aon Consulting, Inc., Davidson Avenue, Somerset, NJ.
    Dear Mr. Macey: Thank you for testifying at the Thursday, September 
25, 2008, Committee on Education and Labor Hearing on Safeguarding 
Retiree Health Benefits.
    Committee Members had additional questions for which they would 
like written responses from you for the hearing record.
    Congressman Tierney asks the following question:
    1. What ideas does ERIC (ERISA Industry Committee) have to offer 
for people who lose their retiree health benefits when they are 
promised them?
    Congressman Andrews asks the following question:
    1. In what court cases were the employers' statement on retiree 
benefits ambiguous and then the court decided in favor of the employer?
    Please send your written response to the Committee on Education and 
Labor staff by COB on Monday, October 13, 2008--the date on which the 
hearing record will close. If you have any questions, please contact us 
at 202-225-3725. Once again, we greatly appreciate your testimony at 
this hearing.
            Sincerely,
                                             George Miller,
                                                          Chairman.
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                ------                                

    [Additional submissions of Mr. Kline follow:]
    [Statement of James A. Klein follow:]

                                                   October 2, 2008.
    Dear Chairman Miller and Ranking Member McKeon: I am writing on 
behalf of the member companies of the American Benefits Council (the 
``Council'') to correct a statement made by a member of the Committee 
concerning the Council's position on health care reform and to share 
our views with you on the Emergency Retiree Health Benefits Protection 
Act of 2007 (H.R. 1322). I respectfully request that this letter be 
included as part of the Committee's record for the September 25, 2008 
hearing on H.R. 1322.
    The Council's approximately 275 members are primarily major U.S. 
employers that provide employee benefits to active and retired workers, 
and do business in most, if not all, states. The Council's membership 
also includes organizations that provide services to employers of all 
sizes regarding their employee benefit programs. Collectively, the 
Council's members either sponsor directly or provide services to 
retirement and health plans that cover more than 100 million Americans.
Correction of the Council's Position on Presidential Candidates' Health 
        Reform Proposals
    During the September 25 hearing on retiree health care coverage, 
Representative Joseph Courtney (D-CT) incorrectly implied that the 
American Benefits Council had evaluated the health reform proposals of 
the two Presidential candidates and favors Senator Obama's approach 
because Senator McCain's approach would be disruptive to the employer-
based health care system.
    We wish to correct the record on this point because, in fact, the 
Council has not endorsed the overall reform proposals of either 
candidate. There are elements of each candidate's proposals that we 
support and aspects of each proposal that we oppose. We assume that 
Rep. Courtney's reference to the Council's position was based on an 
incorrect media account of the results of a survey we recently 
conducted.
    The Council recently released a survey of our members' and other 
corporate executives' views on health care policy that we conducted in 
partnership with Miller and Chevalier, Chartered. By wide margins--and 
regardless of their personal political affiliation--the responses to 
the survey indicate that corporate benefits professionals have serious 
concerns with aspects of both Presidential candidates' proposals. 
Respondents noted that Senator McCain's proposal to repeal the tax 
exemption for employer-sponsored health coverage and Senator Obama's 
proposal to compel employers to ``pay or play'' would both have a 
negative impact on American workers.
    The Council looks forward to working with the next President, as 
well as both Republicans and Democrats in Congress, to craft health 
reform proposals consistent with the Council's views. These include, 
among many other features, retention of the federal framework for 
employer-sponsored health coverage as well as a much stronger emphasis 
on strategies to contain costs and promote better quality health care 
in conjunction with addressing gaps in health care coverage.
Concerns Regarding H.R. 1322
    The Council and its members feel strongly about the importance of 
health care coverage for this nation's retirees. Older Americans need 
health care coverage to ensure that they can retire with dignity and 
security.
    H.R. 1322 would create a new guaranteed benefit that, in many 
instances, was never promised by the employer and that would have a 
retroactive effect. Additionally, the bill would punish employers who 
had continued to provide retiree health benefits when other employers 
had either terminated such programs or never offered such benefits.
    In short H.R. 1322 would have unintended negative consequences. A 
better solution lies in a broader approach that addresses the causes of 
the retiree health care problem. Further, we must reform the health 
care system so that employers can afford to provide retiree health 
coverage. This means:
     Curbing the increase in health care costs and increasing 
the quality of care,
     Providing efficient funding mechanisms to pay for retiree 
health care (such as permitting retirement plan assets to be used on a 
pre-tax basis for retiree health coverage) and
     Allowing all retirees to have a deduction for the cost of 
health coverage when they have no access to an employer plan.
    In addition, the Department of Labor could create a model notice 
stating clearly that employers may retain the right to change or 
terminate retiree health care benefits. Such notice could provide 
clarity with respect to the rights of employers and retirees, and could 
thereby serve to improve the ability of all parties to plan for the 
future.
    Thank you for your consideration of our views.
            Sincerely,
                                            James A. Klein.
                                         American Benefits Council.
                                 ______
                                 
    [Statement of the U.S. Chamber of Commerce follows:]

           Prepared Statement of the U.S. Chamber of Commerce

    Chairman Miller, Ranking Member McKeon, and Members of the 
Committee, the U.S. Chamber of Commerce thanks you for holding this 
hearing on retiree health care and for providing us the opportunity to 
comment on this important issue. We ask that this statement be included 
in the record of the hearing.
    The Chamber is the world's largest business federation, 
representing more than three million businesses and organizations of 
every size, sector, and region. More than 96 percent of the Chamber's 
members are small businesses with 100 or fewer employees, 70 percent of 
which have 10 or fewer employees. Yet, virtually all of the nation's 
largest companies are also active members. We are particularly 
cognizant of the problems of smaller businesses, as well as issues 
facing the business community at large. Besides representing a cross-
section of the American business community in terms of number of 
employees, the Chamber represents a wide management spectrum by type of 
business and location. Each major classification of American business--
manufacturing, retailing, services, construction, wholesaling, and 
finance--is represented. Also, the Chamber has substantial membership 
in all 50 states. Positions on national issues are developed by a 
cross-section of Chamber members serving on committees, subcommittees, 
and task forces. More than 1,000 business people participate in this 
process.
Introduction
    The Chamber shares this Committee's interest in ensuring that 
seniors have access to quality medical coverage and continues to work 
on proposals and ideas with this goal in mind. However, we urge 
Congress to reject proposals that will lead to increased costs and 
fewer benefits. Mandating retiree health benefits or prohibiting 
employers from making changes to future benefits will only discourage 
new employers from offering benefits and could lead to financial 
catastrophe for employers that currently offer these benefits. As such, 
we offer the following the guidelines.
    Proposals on Retiree Health Care Benefits Should Maintain the ERISA 
Framework. The employer-provided pension system is a critical piece of 
retirement security for many Americans. The Chamber believes that the 
key element to the private retirement system is the voluntary nature of 
the system. For employers that choose to implement retirement programs, 
flexibility and choice are key considerations. Consequently, it is 
increasingly important to ensure that there are no statutory, 
practical, or political barriers to innovation that would discourage 
participation in the private retirement system.
    Employers voluntarily offer health benefits to both current 
employees and retirees in response to their workforce needs. Current 
law prohibits employers from reducing or terminating promised benefits 
unless: (a) an employer expressly reserves that right in a plan 
document and (b) the employer fully discloses--in accordance with the 
requirements of ERISA--its right to reduce or terminate retiree health 
coverage. Without this provision to account for exigencies, employers 
will have to weigh the benefit of providing retiree health benefits at 
all against the potential liability of offering a benefit plan that 
could result in the loss of thousands of American jobs.
    Employers Need Flexibility in the Provision of Benefits. It is 
extremely difficult to predict future costs for health care benefits. 
Given the advances in medical technology, medical cost trends and 
patient demand, it is almost impossible to forecast health care 
expenses over the long-term. Therefore, employers require the 
flexibility in place today to respond to increasing costs and changing 
demands within their workforce in order to continue offering retiree 
health benefits.
    Congress Should Focus on Encouraging Employers to Participate in 
the Health System. We believe that there are other ways to reach our 
common goals that will not impact the health care benefits that workers 
receive today. Instead, Congress should focus its attention on 
addressing the underlying cost drivers within our health system by 
promoting health information technology, wellness and prevention, 
coordination of care, and value-based purchasing.
    In addition, Congress should provide opportunities for employers to 
offer retiree health benefits without imposing an untenable burden. As 
such, the Chamber applauds the introduction of H.R. 6288, the Retiree 
Health Accounts Act by Representative McHugh. H.R. 6288 creates new 
tax-free savings accounts that can help workers afford retiree health 
care. The bill also creates a refundable tax credit for individuals who 
contribute to their RHAs, thereby, incentivizing responsible saving for 
health care expenses. Chamber members are excited about this concept 
and look forward to working with Representative McHugh to further 
develop this proposal.
    The Chamber Opposes H.R. 1322 and Similar Proposals. H.R. 1322, the 
Emergency Retiree Health Benefits Protection Act of 2007, would 
prohibit changes, reductions, or terminations of retiree health plans 
once employees have retired. This intrusion upon the right of employers 
and employees to freely associate and make contracts would also force 
employers to retroactively rollback past changes in retiree health 
plans. In addition, the retroactive provisions within H.R. 1322 will 
increase the strain on employer-sponsored health plans that are already 
combating skyrocketing increases in costs. If plans that had to limit 
retiree coverage due to economic pressure were subsequently compelled 
to reassume that liability, the cost of that new unanticipated 
liability would be borne by employees in the form of additional cost 
sharing and reduced benefits, and, potentially, unemployment.
    In either case, whether prospective or retroactive, H.R. 1322 would 
significantly increase both the cost and risk to the employer of 
voluntarily providing retiree health plans at all and would be a major 
incentive to discontinue benefits for new employees or for new 
businesses to not offer benefits at all. These costs and risks will 
have to be paid for by reduced benefits, wages, or jobs.
Conclusion
    As we look at health care reform in the upcoming year, health care 
options for retirees will require careful consideration. We hope that 
Congress will take this opportunity to provide encouragement to 
employers currently providing health care benefits and provide rules 
that will incentivize these employers and not punish them. Thank you 
for your consideration and we look forward to further discussions with 
you.
                                 ______
                                 
    [The statement of Mr. Altmire follows:]

Prepared Statement of Hon. Jason Altmire, a Representative in Congress 
                     From the State of Pennsylvania

    Thank you, Chairman Tierney, for holding this important hearing on 
safeguarding retiree health benefits.
    More and more companies are looking to cut expenses by rolling back 
or eliminating retiree health benefits that they promised to their 
employees. The Kaiser Family Foundation estimated that between 1988 and 
2005, the number of large firms offering retiree health coverage was 
cut in half, from 66 percent to 33 percent. For years, millions of 
workers believed that if they worked hard they would be taken care of 
during their retirement through the benefits that were promised to them 
by their employers.
    Now, many of these retirees are forced to find another way to 
obtain and pay for health coverage because their employer made a 
decision to renege on their promise as a cost saving measure. Today we 
will discuss how this happened and what can be done to prevent this 
from happening in the future.
    Thank you again, Mr. Chairman, for holding this hearing. I yield 
back the balance of my time.
                                 ______
                                 
    [The statement of Ms. Shea-Porter follows:]

   Prepared Statement of Hon. Carol Shea-Porter, a Representative in 
                Congress From the State of New Hampshire

    I thank Chairman Miller for this hearing today, and I thank 
Congressman Tierney for his leadership on this issue.
    We have all read the news reports of companies making cuts to their 
retiree benefits. Skyrocketing health care costs and shrinking profit 
margins leave these companies looking for places to trim costs. Sadly, 
these costs savings are all too often being found by cutting back, or 
eliminating altogether, retiree health benefits. I have heard from a 
number of my constituents who are not only concerned about this growing 
trend, but they are rightfully outraged.
    This not only highlights the need for real and significant reform 
to the way health care is provided in our country, but it shines a 
spotlight on the increasing financial burden being faced by working and 
middle-class families. The burden of increasing health care, food, and 
fuel costs is only intensified for those among us living on a fixed 
income--many of whom are retirees who are also counting on the benefit 
plans promised to them by their employers in exchange for their years 
of hard work. These retirees held up their end of the agreement, it is 
outrageous to expect any less of the companies that they devoted 
themselves to for so many years.
    I look forward to examining this issue further during this hearing 
today and it is my hope that we can work together to protect the 
benefits of retirees so that they can be confident that they will 
receive the benefits that were promised them in exchange for their hard 
work.
                                 ______
                                 
    [Whereupon, at 12:06 p.m., the committee was adjourned.]

                                 
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