What are Legacy Costs?

Mary McMahon
Mary McMahon

Legacy costs are expenses a company incurs in a previous era, usually through committing to benefits plans. Older, larger companies experience the most problems with legacy costs for a variety of reasons. These expenses do not generate revenue for the parent company, and they are sometimes used as an example of a cost that can make it difficult for a company to be financially viable. Some companies have taken steps to attempt to reduce their legacy costs and increase their profits.

Pension payouts can become substantial as more members of the workforce retire and older retired workers live longer.
Pension payouts can become substantial as more members of the workforce retire and older retired workers live longer.

Many companies commit to paying into pension plans, health insurance programs, and other benefits because they believe that it is an important part of doing business. These companies take prudent steps to protect their employees and make them feel like part of the family, especially during periods of prosperity. As priorities change, the economy falters, and a company matures and is forced to pay benefits to more employees, these legacy costs can become significant.

If, for example, 100 workers retire every year, a company that has been committing to pay into pension plans for 50 years will be supporting a lot of workers on pensions. On the other hand, a newer company with a smaller workforce retiring 50 employees a year for the last 20 years will be paying out much less, making these costs a less significant expense. The bigger and older the company, the higher the legacy costs can be.

Historically, it was very common to offer extensive employee benefits and to encourage workers to stay with the same employer for life. This approach to hiring and doing business has changed, and fewer companies make this a priority today. Newer employees may not be able to access the same benefits available to older employees, in part in an attempt to control legacy costs. Companies struggling with bankruptcy may also propose cutting benefits to older employees as part of their reorganization proceedings.

Public filings can be used to determine how much money a company is sinking into legacy costs. Looking at historic filings provides interesting information about how much the company has spent over the years and how legacy costs impact the overall financial health of the company. It can also be helpful to compare these costs with the size of the workforce and retiree community to determine how much is being spent on each employee and retiree. When companies adjust their benefits programs, the proposals can be compared with public filings to see how much of a difference will be made.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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