Cutting benefits

With so many ways to tap pension surpluses, companies had an incentive to cut pension benefits even when their plans were overfunded.

Many companies, including AT&T, converted their pensions to so-called cash-balance plans, which slowed the growth of benefits for older workers and, in many cases, froze them altogether for a period of years.

Skarka, 64, who left the company in 2003, says his pension would have been $50,000 a year, but is only $18,000 because of the pension changes.

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His $1,500 monthly pension was further reduced by $500 a month to pay for his share of retiree health benefits, leaving the South Thomaston, Maine, resident a monthly pension of just $1,000.

While unable to comment on an individual case, an AT&T spokesman said, "We continue to provide great benefits -- including market-competitive health, pension and savings plans -- to our 1.2 million employees, retirees and their dependents."

Lump-sum payouts are another way companies can cut pension costs. Such payments, which entice older workers to leave, may be worth less than the actual value of the pension benefit. They also shift all the investment, interest rate and longevity risk to the retirees.

What to watch for: If you are offered a lump sum, ask your employer to show you how the payout stacks up against a monthly pension in retirement. You might have to hire an actuary to do this.

Financing executive pay

Employers' ability to generate profits by cutting retiree benefits coincided with the trend of tying executive pay to performance. Intentionally or not, top officers who green-lighted massive retiree cuts were indirectly boosting their own compensation.

As their pay grew, executives deferred more of it. Supplemental executive pensions, which are based on pay, also ballooned. These executive liabilities account for much of the "spiraling" pension costs many companies complain about.

Many companies -- especially large banks in the past few year -- have taken out billions of dollars of life insurance on their employees. The policies function as tax-sheltered investment pools that can be used to offset the cost of executive benefits. The companies also collect tax-free death benefits when employees, former employees and retirees die.

What to watch for: Your employer -- and former employers -- doesn't have to tell you if it bought a policy on your life before 2006. If your employer has taken out insurance on you in recent years, it must get your consent, but it doesn't have to tell you how much the policy is for. It is up to you whether you want to be a human resource to finance executive pay.