a

GAO

United States General Accounting Office

Report to Congressional Requesters

December 2001 UNITED STATES 

POSTAL SERVICE

Information on 

Retirement Plans

GAO-02-170
Page i GAO-02-170 United States Postal Service

Contents

Letter 1

Results in Brief 2

Background 3

Scope and Methodology 7

Estimated Future Annual Costs for the Three Plans 8

Costs and Payments of the Three Individual Plans 10

Funding Status of the Three Plans 14

Portion of Liability Due to Increases in Employee Pay 17

Portion of Liability Attributable to Increases in Retiree COLAs 19

An Additional Retirement Benefit: The Post-Retirement Health 

Benefit Program 20

Service Faces Major Challenges 21

Questions for Further Consideration and Analysis 22

Agency Comments 22

Appendixes

Appendix I: USPS Total Annual Retirement Plan Costs 24

Appendix II: USPS Retirement Liability for Employees’ Pay Increases 26

Appendix III: USPS Retirement Liability for Cost of Living Adjustments 27

Appendix IV: Comments From the Office of Personnel Management 28

GAO Comments 30

Tables Table 1: USPS and Employee CSRS Contribution Rates, as a 

Percentage of Basic Pay 5

Table 2: USPS and Employee FERS Contribution Rates, as a 

Percentage of Basic Pay 6

Table 3: USPS and Employee CSRS Offset Plan Contribution Rates, 

as a Percentage of Basic Pay 7

Figures Figure 1: Total Historical and Projected Annual Retirement Costs 9

Figure 2: Historical and Projected Standard Annual Cost of 

CSRS 10

Figure 3: Historical and Projected Total Costs for Pay Increases, 

COLAs, and Interest Payments 12

Figure 4: Historical and Projected Cost of FERS 13

Figure 5: Historical and Projected Annual Cost of the CSRS Offset 

Plan 14
Contents

Page ii GAO-02-170 United States Postal Service

Figure 6: Changes in Employee Pay Increases and COLA Liability 

Ending Balance 15

Figure 7: Comparison of Cumulative Annual Pay Increases and 

COLA Liability to Cumulative Payments 16

Figure 8: Retirement Liability Attributable to Increases in 

Employee Pay 18

Figure 9: Changes to Retirement Liability Due to Increases in 

Retiree COLAs 20

Abbreviations

CSRDF Civil Service Retirement and Disability Fund

CSRS Civil Service Retirement System

CPI-W Consumer Price Index for Urban Wage Earners and Clerical 

Workers

COLA cost-of-living adjustments

FEHBP Federal Employees Health Benefit Program

FERS Federal Employees Retirement System

OPM Office of Personnel Management

TSP Thrift Savings Plan

USPS United States Postal Service
Page 1 GAO-02-170 United States Postal Service

United States General Accounting Office

Washington, D.C. 20548

A

December 31, 2001 Letr

The Honorable Joseph I. Lieberman

Chairman

The Honorable Fred Thompson

Ranking Minority Member

Committee on Governmental Affairs

United States Senate

The Honorable Daniel K. Akaka

Chairman

The Honorable Thad Cochran

Ranking Minority Member

Subcommittee on International Security, Proliferation, 

and Federal Services

Committee on Governmental Affairs

United States Senate

Your March 21, 2001, letter expressed concern about a number of issues 

pertaining to the United States Postal Service’s (USPS) financial condition. 

This report addresses one of the issues raised in your letter, namely, 

identifying longer-term structural or operational issues that may affect the 

Service’s ability to provide affordable universal postal service on a breakeven basis. One key operational issue involves the Service’s retirement 

costs and future liabilities. The Service’s financial outlook has deteriorated 

significantly over the past few years. The Service finished fiscal year 2000 

with a $199 million net loss and recently announced a $1.7 billion net loss 

for fiscal year 2001. The Service also projects a net loss of $1.35 billion for 

fiscal year 2002.1

 However, it is unknown what the impact of the events of 

September 11, 2001 and the subsequent delivery of anthrax spores through 

the U.S. mail will have on the volume and cost of future mail service. 

Consequently, estimated losses, and other projections in this report, which 

we and the Service’s independent auditors have not verified, may be 

changed by USPS at a later date.

These current and projected losses are putting pressure on the Service’s 

cash flows from operations and its debt situation. One major expense the 

Service incurs each year is for retirement benefits, and the Service 

1

For fiscal year 2001 USPS reported total revenue of $65.8 billion, and projects $68.8 billion 

in total revenue for fiscal year 2002.
Page 2 GAO-02-170 United States Postal Service

anticipates significant increases in its retirement benefit expenses in future 

years. As agreed with your offices, we are providing information about the 

cost and funding requirements of the Service for federal retirement plans 

and other retirement benefits, which were 14.7 percent of total operating 

expenses in fiscal year 2000. 

Results in Brief According to USPS officials, its annual retirement plan costs are projected 

to increase significantly in the next 10 years from a cost of $8.5 billion in 

fiscal year 2000 to approximately $14 billion in fiscal year 2010. This 

significant increase presents a serious financial challenge to USPS 

management. The projected future cost of retirement benefits could have a 

material impact on the Service’s ability to operate on a break-even basis 

without significant increases to the rates charged for universal postal 

service. 

Contributing to the Service’s increasing annual retirement costs is a 

mounting debt related to pay increases to employees resulting from new 

labor contracts and annual cost-of-living adjustments (COLA) for retirees, 

which were prescribed by law. USPS is responsible for paying both of 

these additional retirement costs2

 as part of its goal to operate on a selfsupporting, break-even basis and cover its expenses almost entirely 

through postal revenues, not taxpayer dollars. The Service pays for these 

costs on an installment basis with related interest charges, as prescribed by 

law. Consequently, the Service reported to the Office of Personnel 

Management (OPM) an outstanding liability for future retirement benefits 

associated with this obligation of $32.2 billion as of September 30, 2000, 

and anticipates paying an additional $16.5 billion in future interest charges 

on this retirement liability over a 30-year period. The Service’s cumulative 

retirement liability for this obligation has been growing each year even 

though the Service has been making significant, annual installment 

payments. 

Although not part of a retirement plan, the Post-Retirement Health Benefit 

Program is an additional benefit available to USPS retirees. The cost of this 

benefit was $744 million in fiscal year 2000. When this benefit cost is added 

2

According to OPM, the U.S. Treasury makes a special annual contribution to OPM on behalf 

of all other federal agencies to cover increases in accumulated retirement benefits resulting 

from new or liberalized benefits, increases in pay, or extension of coverage to new employee 

groups. 
Page 3 GAO-02-170 United States Postal Service

to the retirement plan cost of $8.5 billion in fiscal year 2000, the total 

retirement-related cost for fiscal year 2000 is $9.3 billion. The Service 

projects the cost of this additional post-retirement health benefit to be 

$2 billion in fiscal year 2010. When this is added to the $14 billion of 

retirement plan expenses, the Service may be faced with a total retirementrelated cost of $16 billion in fiscal year 2010.

USPS and OPM substantially agreed with our report. Matters of emphasis 

and points of clarity accompanying USPS’ oral comments have been 

reflected in this report, as appropriate. OPM’s written response is reprinted 

in appendix IV, along with our comments. 

Background The United States Postal Service commenced operations on July 1, 1971, in 

accordance with the provisions of the Postal Reorganization Act of 1970 

(P.L. 91-375). The Service is an independent establishment of the executive 

branch with a goal to operate on a break-even basis and cover its expenses 

almost entirely through postal revenues. The equity the U.S. government 

held in the former Post Office Department became the initial capital of 

USPS (approximately $3 billion), and the U.S. government remained 

responsible for all the liabilities attributable to operations of the former 

Post Office Department. At inception, the Postal Service did not have any 

unpaid liabilities to OPM for retirement benefits. At that time, USPS 

employees participated in the federal Civil Service Retirement System 

(CSRS), which provided them the same benefits as other federal 

employees, that is, their future retirement benefits would be paid by OPM 

based on payroll deductions and USPS contributions under provisions of 

law governing CSRS.

With over 900,000 employees at the end of fiscal year 2000, USPS has the 

largest number of federal civilian employees, and Fortune magazine ranks 

it as the second largest employer in the United States. Similar to other 

federal career employees, USPS career employees participate in one of 

three federal retirement systems primarily administered by OPM: 

• the Civil Service Retirement System, 

• the Federal Employees Retirement System (FERS), and

• the CSRS Offset Plan.

At the end of fiscal year 2000, nearly 786,000 USPS career employees, or 87 

percent of the Service’s employees, were participating in one of the three 

federal retirement programs. The remaining 13 percent were casual labor 
Page 4 GAO-02-170 United States Postal Service

and transitional employees who do not participate in the federal retirement 

plans. Of the total career employees, 263,383 employees (33.5 percent) 

participated in CSRS; 510,509 employees (65 percent) participated in FERS; 

and 12,021 employees (1.5 percent) participated in the CSRS Offset Plan. 

Plan 1 – Civil Service 

Retirement System 

CSRS is administered by OPM, which maintains a Civil Service Retirement 

and Disability Fund (CSRDF) for federal employees. CSRS is a defined 

benefit retirement plan,3

 which provides a basic annuity4 to participants. 

Benefit payments to federal retirees and their survivors participating in any 

of the three retirement plans are made from CSRDF. CSRS covers 

employees hired prior to January 1, 1984. Employees hired after 

December 31, 1983, are not eligible for coverage in CSRS, but participate in 

either FERS or the CSRS Offset Plan. Contributions to the CSRS plan are 

collected from the Service and its employees and deposited into OPM’s 

CSRDF, according to the proportionate sharing arrangement established in 

law.5

 Participating USPS employees contribute in the same proportion and 

percentage amounts as most other civilian federal employees. USPS and its 

employees also contribute to Medicare at the rate prescribed by law.

3

A defined benefit plan specifies the benefit to be received at retirement by the employee 

participant. The plan calculates the benefit based on an established formula that 

incorporates the average or final salary and years of service. 

4

An annuity is a stream of equal periodic amounts either paid to or received from parties 

according to an agreement specifying the terms of the payment or receipt.

5

OPM reported in its fiscal year 2000 Actuarial Valuation of the Civil Service Retirement and 

Disability Fund that it had an unfunded actuarial liability of $512.9 billion because the 

methods used to compute the standard annual contributions differ from what is needed to 

fully fund the retirement plans over the balance of federal employees’ working careers. This 

unfunded liability relates to the CSRS plan as a whole, not FERS or the CSRS Offset Plan, 

and is not specific to the Service. It is currently unknown whether OPM’s unfunded pension 

liabilities for CSRS could have a future impact on USPS. 
Page 5 GAO-02-170 United States Postal Service

Table 1: USPS and Employee CSRS Contribution Rates, as a Percentage of Basic 

Pay

In addition to the contributions to CSRS discussed above, the Service is 

responsible for making additional contributions to CSRDF to fund the 

future retirement costs of increases to pay that the Service granted to 

employees under terms in new labor contracts and the annual COLAs to 

retirees, which were prescribed by law. The provisions for the Service to 

make these additional contributions to OPM were included in amendments 

to the law governing CSRS and make the funding of USPS retirement plans 

different from other federal agencies making annual contributions to the 

federal CSRS retirement plan.6

 USPS makes these payments without any 

additional contributions from employee pay. 

Plan 2 - Federal Employees 

Retirement System 

In the Social Security Amendments of 1983 (P.L. 98-21), Congress mandated 

participation in Social Security by all civilian federal employees initially 

hired after December 31, 1983. Because Social Security provides both 

retirement and disability benefits, and because enrolling federal workers in 

both CSRS and Social Security would have resulted in employee 

contributions of more than 13 percent of each worker’s salary, Congress 

directed the development of a new federal employee retirement system 

with Social Security as the cornerstone. The result of these efforts was 

FERS, created by P.L. 99-335, enacted on June 6, 1986.

Calendar year USPS Employee

1984 through 1998 7.00% 7.00%

1999 7.00% 7.25%

2000 7.00% 7.40%

6

See 5 U.S.C. § 8348 (h) and (m). See also 39 U.S.C. § 1005 (d).
Page 6 GAO-02-170 United States Postal Service

All permanent federal employees, including USPS employees, whose initial 

federal employment began after December 31, 1983, are covered by FERS, 

as are employees who voluntarily switched from CSRS to FERS during 

specified “open seasons.” FERS consists of three elements: Social Security, 

a FERS annuity (a defined benefit plan), and a Thrift Savings Plan (TSP) (a 

defined contribution retirement savings and investment plan7

). 

Table 2: USPS and Employee FERS Contribution Rates, as a Percentage of Basic 

Pay

The Service and its employees also contribute to Social Security and 

Medicare at the rates prescribed by law. 

In addition, USPS is required to contribute to TSP a minimum of 1 percent 

per year of basic pay for employees covered by FERS. The Service also 

matches voluntary employee contributions up to 3 percent of an 

employee’s basic pay, and 50 percent of a contribution from 3 to 5 percent 

of basic pay. 

Plan 3 – CSRS Offset Plan In the legislation that created FERS, Congress also created the CSRS Offset 

Plan. Typically, CSRS Offset retirement applies to employees who had 

breaks in service that exceeded 1 year and ended after 1983 and had 5 years 

7

A defined contribution plan specifies the amount of the periodic contribution to be paid by 

the employer rather than the benefits to be received by the employee participant, as in a 

defined benefit plan. A participant’s benefits are usually based on the amount credited to 

the individual’s account. Sponsor contributions are determined by applying a specified rate 

against a variable, such as labor hours worked or wages earned.

 Calendar year USPS Employee

1987 13.50% 1.30%

1988 through 1989 12.86% 0.94%

1990 13.00% 0.80%

1991 through 1994 12.90% 0.80%

1995 through 1997 11.40% 0.80%

1998 10.70% 0.80%

1999 10.70% 1.05%

2000 10.70% 1.20%
Page 7 GAO-02-170 United States Postal Service

of creditable civilian service as of January 1, 1987. CSRS Offset retirement 

coverage also applies to employees hired before January 1, 1984, who 

acquired CSRS coverage for the first time after that date and had at least 5 

years of creditable service by January 1, 1987. Under this plan, each 

employee and employer contribute an equal amount into Social Security, as 

prescribed by law. In retirement, these employees’ CSRS benefits are 

reduced (offset) by a portion of their Social Security benefits.

Under the provisions of the CSRS Offset Plan, both USPS and the employee 

contribute a percentage of the employee’s basic pay to the CSRS fund, 

Social Security, and Medicare at the statutorily prescribed rates. 

Table 3: USPS and Employee CSRS Offset Plan Contribution Rates, as a Percentage 

of Basic Pay

Scope and 

Methodology

To better understand the full nature and components of the Service’s 

retirement plans, we (1) interviewed officials at the Service and OPM, 

(2) reviewed and analyzed documents, including legislation, funding plans, 

budget documents, financial statements, USPS projections, and fiscal 

impact statements, and (3) analyzed the future projected costs of these 

plans. Our scope did not include identifying ways for the Service to 

respond to the current legal framework for funding its retirement liabilities 

to OPM for annual increases to CSRS basic pay and retiree COLAs. We 

conducted our work from May 2001 through October 2001 in accordance 

with generally accepted government auditing standards. We did not 

independently verify underlying data. We obtained oral comments from 

USPS and written comments from OPM on a draft of this report. OPM’s 

written comments are reprinted in appendix IV. 

 Calendar year USPS Employee

1984 through 1998 7.00% 0.80%

1999 7.00% 1.05%

2000 7.00% 1.20%
Page 8 GAO-02-170 United States Postal Service

Estimated Future 

Annual Costs for the 

Three Plans

The Service projects that the total annual retirement costs for the three 

plans, including installment payments for its additional liability for 

increases in pay and retiree COLAs under CSRS, will increase over the next 

10 years from $8.5 billion in fiscal year 2000 to an estimated $14 billion in 

fiscal year 2010. The FERS portion of that total, including Social Security, 

is estimated to more than double from $4.1 billion in fiscal year 2000 to 

$9 billion in fiscal year 2010. See figure 1 for the total of all the retirement 

plans’ historical and projected annual costs, including the installment 

payments made by USPS for its additional obligation to OPM for increases 

in pay and retiree COLAs under CSRS. See appendix I for the dollar 

amounts of each plan’s cost, including payments for increases to CSRS 

employees’ basic pay and retirees’ COLAs. 8

8

We did not review the Postal Service’s underlying assumptions that would support the 

projected amounts for fiscal years 2001 through 2010. Therefore, no comparison could be 

made to OPM assumptions normally used for such projections. Such a comparison would 

reveal any discrepancies in the method and amounts that may affect the financial outcome 

and the reliability of the projections. 
Page 9 GAO-02-170 United States Postal Service

Figure 1: Total Historical and Projected Annual Retirement Costs

Source: USPS data (not independently verified by GAO).

A discussion of the costs for each of the three individual plans follows.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

19

1998

2000

2002

2004

2006

2008

2010

96

1994

1992

19

1990

88

19

1986

84

1982

1972

1974

1976

1978

1980

(Dollars in millions)

CSRS

FERS

CSRS Offset

Social Security

CSRS pay increases

Annuitant COLA

Projected
Page 10 GAO-02-170 United States Postal Service

Costs and Payments of 

the Three Individual 

Plans

CSRS The cost of the CSRS retirement plan for fiscal year 2000 was $800 million, 

excluding the payments made toward the Service’s additional obligation to 

OPM. Although total pension costs for all three retirement plans are 

expected to increase significantly, USPS estimates that the cost for the 

standard, annual CSRS contributions9

 will decrease in the future as current 

employees participating in the plan begin to retire. (See figure 2.) 

Figure 2: Historical and Projected Standard Annual Cost of CSRS

Source: USPS data (not independently verified by GAO).

9

For purposes of this report, the standard annual contributions to a retirement plan 

administered by OPM refer to the employers’ contributions, based on employee pay, as set 

forth by law.

0

200

400

600

800

1,000

1,200

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

(Dollars in millions)

Projected
Page 11 GAO-02-170 United States Postal Service

In addition to the standard, annual contributions to CSRS discussed above, 

the Service is responsible for paying additional amounts to CSRDF to fund 

the future costs of pay increases that USPS granted to its employees under 

terms in new labor contracts and the annual COLAs to retirees, which were 

prescribed by law. 

The provisions for USPS to make these additional contributions to OPM 

make the funding of the Service’s retirement plans for both pay increases 

and COLAs different from other federal agencies making annual 

contributions to the federal CSRS retirement plan. 

As described in more detail in a later section of this report, USPS makes 

annual installment payments to OPM toward its additional liability for 

CSRS employees’ pay increases and retirees’ COLAs. The total installment 

payment for these liabilities in fiscal year 2000 was $3.6 billion, which 

included $1.6 billion in interest charges and $2 billion in principal 

payments. The Service estimates that its annual payments for these 

liabilities will continue to be significant, increasing steadily through fiscal 

year 2010, then decreasing at some later point as the number of employees, 

retirees, and survivors under CSRS decreases. (See figure 3.) 
Page 12 GAO-02-170 United States Postal Service

Figure 3: Historical and Projected Total Costs for Pay Increases, COLAs, and Interest Payments

Source: USPS data (not independently verified by GAO).

FERS The cost of FERS for fiscal year 2000 was $4.1 billion. The Service 

estimates that the annual cost of FERS will more than double to 

approximately $9 billion by fiscal year 2010. The large increase in FERS 

costs is expected because new employees (those hired after January 1, 

1984) are mostly only eligible to participate in FERS. (See figure 4.) As 

employees in CSRS retire, they will be replaced by employees participating 

in FERS. The employers’ standard, annual contributions toward FERS are 

higher than CSRS because FERS contributions are calculated by OPM on a 

stronger actuarial basis than CSRS contributions. FERS contributions are 

on a “dynamic” basis, which includes assumptions for future rates of 

inflation, future salary increases, and a provision for an assumed 

percentage rate of return on plan investments. Together, USPS 

contributions and employee withholdings are intended to fully fund the 

annual pension cost for employees covered under FERS over the 

employees’ working careers with the Service. 

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000 (Dollars in millions)

Projected

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010
Page 13 GAO-02-170 United States Postal Service

Figure 4: Historical and Projected Cost of FERS

Source: USPS data (not independently verified by GAO).

CSRS Offset Plan The cost of this plan for fiscal year 2000 was $35 million. Although total 

pension costs for USPS are expected to increase significantly, it estimates 

that the standard, annual contributions to the CSRS Offset Plan will 

decrease in the future as current employees participating in the plan begin 

to retire. (See figure 5.) The plan became effective during fiscal year 1986, 

but it covered certain employees hired after 1983; consequently, amounts 

paid in fiscal years 1986 and 1987 by the Service represent the retroactive 

effect of those costs. 

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

(Dollars in millions)

Projected
Page 14 GAO-02-170 United States Postal Service

Figure 5: Historical and Projected Annual Cost of the CSRS Offset Plan 

Source: USPS data (not independently verified by GAO).

Funding Status of the 

Three Plans

The Service pays in full its standard, annual retirement payments to OPM 

under provisions of the laws governing all federal employees participating 

in CSRS, FERS, and the CSRS Offset Plan. In addition, the Service reported 

in its fiscal year 2000 audited financial statements an outstanding liability 

for future retirement benefits of $32.2 billion (excluding $16.5 billion of 

future related interest charges over 30 years) due to obligations that made 

the Service liable for pay increases that employees received under terms of 

new labor contracts and for COLAs to retirees, who retired on or after 

July 1, 1971, and their survivors, under the CSRS retirement plan. COLAs 

are based on the rate of inflation as measured by the Consumer Price Index 

for Urban Wage Earners and Clerical Workers (CPI-W). As prescribed by 

law, all CSRS retirees and survivors receive yearly COLAs equal to the 

annual percentage change in the CPI-W.

The Service’s total liability balance has generally been increasing each year, 

even though it has been making annual installment payments toward this 

retirement liability. (See figure 6.)

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0

20

40

60

80

100

120

140

160

180

200 (Dollars in millions)

Projected
Page 15 GAO-02-170 United States Postal Service

Figure 6: Changes in Employee Pay Increases and COLA Liability Ending Balance

Source: USPS data (not independently verified by GAO).

The increase is occurring because the annual additions to the Service’s 

liability have generally been greater than the annual principal payments 

made under the installment payment provisions set forth by law. For 

instance, the Service’s fiscal year 2000 additional liability was $2.7 billion, 

while its required principal installment payment was $2 billion, plus 

interest of $1.6 billion. Figure 7 displays how the annual increases in the 

liability have cumulatively increased more rapidly than the annual 

accumulated principal payments.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000 (Dollars in millions)

CSRS

COLA

1987

1972

19731974

1975

1976

19771978

1979

1980

1981

1982

1983

19841985

1986

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000
Page 16 GAO-02-170 United States Postal Service

Figure 7: Comparison of Cumulative Annual Pay Increases and COLA Liability to Cumulative Payments

Source: USPS data (not independently verified by GAO).

10,000

20,000

30,000

40,000

50,000

60,000

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

(Dollars in millions)

0

Cumulative liability

Cumulative payments

Net liability balance
Page 17 GAO-02-170 United States Postal Service

Portion of Liability Due 

to Increases in 

Employee Pay

By law, whenever USPS increases a CSRS employee’s pay as a result of new 

labor union contracts, it is liable to OPM for the present value of additional 

future retirement benefits to be paid to the employee upon retirement as a 

result of the pay increase.10 When an increase in pay is authorized, OPM 

determines the Service’s present value of the retirement liability for the 

future retirement benefits that will result from the pay increase. The 

Service is required to pay for this incremental liability in 30 equal annual 

installments, with interest computed at the rate used in the most recent 

valuation of CSRS, with the first payment due at the end of the fiscal year in 

which an increase in pay becomes effective. The interest rate for 

calculating the present value of the incremental liability and for 

determining the amortization payments has been 5 percent for 29 years. 

According to OPM’s Office of the Actuary, the law prescribes that the 

calculation of the additional annual cost of retirement benefits due to 

increases in basic pay be made on the “static” basis, which assumes no 

future inflation and no future general schedule salary increases. OPM’s 

Board of Actuaries has recommended a 5-percent discount rate for the 

purpose of the static valuation. OPM does not make the calculations on a 

“dynamic” basis, which would include an assumed annual rate of inflation, 

future salary increases, and a provision for an assumed percentage rate of 

return on plan investments. 

For fiscal year 1972, the Service’s first fiscal year of operations, OPM 

determined that the additional liability for basic pay increases was 

approximately $1 billion. Under the 30-year installment arrangement, the 

Service paid $63 million toward that additional cost for fiscal year 1972, 

leaving an unpaid liability balance of $954 million to be paid for future 

years. In each subsequent year, additional liabilities were accrued as a 

result of pay increases in each of those years. Because the liabilities being 

added each year are also being paid off in 30-year installments, the overall 

liability for unpaid pension costs has grown dramatically, even though the 

Service has been making annual payments on the accumulating balance. 

Figure 8 shows the growth in the liability balance attributable to increases 

in CSRS employee pay. For fiscal year 1972 through fiscal year 1981, the 

liability balance grew from approximately $1 billion to $10.3 billion. During 

the next 10 fiscal years (1982 through 1991), the balance grew to 

10See 5 U.S.C. § 8348 (h).
Page 18 GAO-02-170 United States Postal Service

$21.8 billion (a 112-percent increase), and in the latest 9 fiscal years (1992 

through 2000), it grew to $25.9 billion (a 19-percent increase). As more of 

the current CSRS employees eligible for basic pay increases retire, future 

increases in the liability balance should level off and, eventually, the 

balance due for pay increases should start to decrease. However, this 

decrease will likely be accompanied by an increase in the growth of retiree 

COLA liabilities until the CSRS retiree group begins to diminish.

Figure 8: Retirement Liability Attributable to Increases in Employee Pay

Source: USPS data (not independently verified by GAO).

In the 29 years from fiscal years 1972 through 2000, the OPM assessments 

for pay increases totaled $42.1 billion. During that same period, the Service 

paid $16.2 billion in principal payments toward that liability, plus interest of 

$21.6 billion, for total payments to OPM of $37.8 billion. As of 

September 30, 2000, the Service owed $25.9 billion in principal, and its 

annual principal payments have generally been less than the additional 

liabilities assessed each year. Because the Service is making principal 

payments in amounts less than the new liability added each year, the 

unpaid balance is growing, as is the interest charged annually on the unpaid 

balance. See appendix II for the annual liabilities added by OPM to the 

0

5,000

10,000

15,000

20,000

25,000

30,000

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

(Dollars in millions)
Page 19 GAO-02-170 United States Postal Service

Service’s balance for CSRS pay increases and the annual installment 

payments made by the Service to OPM to reduce the liability balance.

Portion of Liability 

Attributable to 

Increases in Retiree 

COLAs 

By law, the Service is also liable for its share of the COLAs granted to 

retirees who retired after July 1, 1971, and their survivors. As prescribed by 

law, CSRS retirees and survivors receive yearly COLAs. Each year, OPM 

determines the estimated increase in the Service’s liability for the COLA 

increase and establishes the amount of the installment payments to be 

made over a 15-year period, plus interest at 5 percent per year. 

Since fiscal year 1990, the Service has recorded a total liability of 

$11.1 billion for retiree COLA increases. Of that liability amount, the 

Service has paid OPM $4.8 billion, plus interest of $2.3 billion for a total of 

$7.1 billion. Because the Service is only required to pays a portion of the 

annual increase of this liability, its payments have generally been less than 

the additional liabilities added each year, and the balance, as well as the 

interest on the unpaid balance, continues to grow. Even with projections of 

low inflation, the Service expects the new annual liability amounts to be 

larger than its annual payments on the liability because the retiree/survivor 

population will increase. Thus, the total liability for retiree COLAs is 

expected to continue to grow over time until most of the CSRS annuitants 

are deceased. 

Figure 9 depicts the change in the liability amount. Also, see appendix III 

for the annual liabilities added by OPM to the Service’s liability balance for 

COLA increases and the annual installment payments made by the Service 

to OPM toward reducing the balance. 
Page 20 GAO-02-170 United States Postal Service

Figure 9: Changes to Retirement Liability Due to Increases in Retiree COLAs

Source: USPS data (not independently verified by GAO).

An Additional 

Retirement Benefit: 

The Post-Retirement 

Health Benefit 

Program

Although not part of a retirement plan, the Post-Retirement Health Benefit 

Program is an additional benefit available to USPS retirees. The postretirement health benefit represents a significant cost, which is also 

expected to increase in future years. USPS estimates that the annual cost 

of this benefit will increase from $744 million in fiscal year 2000 to about 

$2 billion in fiscal year 2010. In the Service’s Integrated Financial Plan for 

Fiscal Year 2002, health care costs are projected to increase by 10 percent; 

however, subsequent to that projection it was reported that the average 

premiums for employees will rise an average 13 percent in fiscal year 2002. 

These large, unexpected increases in health care costs make projections of 

future costs very uncertain.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

(Dollars in millions)
Page 21 GAO-02-170 United States Postal Service

USPS is required to pay the employer’s share of health insurance premiums 

incurred through participation in the Federal Employees Health Benefit 

Program (FEHBP) for all employees who retired on or after July 1, 1971, 

and their survivors.11 The annual cost for this program is included in the 

Service’s Total Compensation and Benefits expense reported in its annual 

financial statements and disclosed separately in the footnotes to those 

statements. 

When the cost of the post-retirement health benefits of $744 million for 

fiscal year 2000 is added to the Service’s total retirement costs of 

$8.5 billion for fiscal year 2000, the total for retirement-related costs 

becomes $9.3 billion in fiscal year 2000. USPS projects that in fiscal year 

2010, these total retirement-related costs will increase to $2 billion and 

$14 billion, respectively, for a total of $16 billion. The Service also 

projected that these costs, in fiscal years 2001 and 2002, would increase to 

$9.9 billion and $10.3 billion, an increase of $600 million and $400 million 

over the preceding year for each of those years, respectively. These 

increases exert upward pressure on postal rates and constrict cash flows 

needed for operating purposes. 

Service Faces Major 

Challenges

Many stakeholders are calling for a structural transformation of the Service 

because of the major financial, operational, human capital, and market 

competition challenges confronting it. Accordingly, in April 4, 2001, 

testimony12 before the House Committee on Government Reform, the 

Comptroller General announced that we had placed the Service’s 

transformational efforts and long-term outlook on our high-risk list. This 

focused needed attention on the challenges facing the Service. The Service 

responded by establishing a Transformation Plan Task Force on July 25, 

2001. The task force will identify options to transform the Service so that it 

will be able to resolve the many challenges it faces in the future. 

11See Budget Reconciliation Act of 1990 (P.L. 101-508).

12See Transformation Challenges Present Significant Risks (GAO-01-598T, April 4, 2001).
Page 22 GAO-02-170 United States Postal Service

Questions for Further 

Consideration and 

Analysis

As the Transformation Plan Task Force examines the impact of these 

retirement costs and liabilities on the Service’s overall financial condition 

and future operations, there are key questions that need to be addressed. 

Once the task force has analyzed these questions in detail, it can weigh 

various options and their long-term implications for the Service. Some of 

the specific questions that we see as being important include the following.

• What is the significance of USPS’ growing retirement-related obligations 

on various options that will be considered as part of its transformation? 

How would issues relating to retirement-related obligations be 

addressed if a specific option were to be chosen, such as transforming 

USPS into a government corporation or a publicly owned company?

• What is the impact of USPS retirement-related obligations, including 

retiree health care costs, on its overall financial condition, equity 

position, cash flows from operations, and ability to fund capital outlays 

that depend on positive cash flows? Also, what is the impact of the 

Service’s retirement-related obligations on the scope and quality of 

postal services that depend on the use of funds for continued 

modernization and maintenance of capital assets?

• What is the potential impact of growing retirement-related expenses on 

postal rates? Could this impact affect USPS’ ability to be successful in a 

marketplace with increasing competition from electronic alternatives, 

private delivery companies, and foreign postal administrations?

• Under current law, is USPS fully covering OPM’s future retirement costs 

for USPS employees, or is USPS paying more than is needed to cover 

OPM’s future payments to USPS retirees? Has OPM estimated the 

amount of future obligations to USPS retirees, and has OPM determined 

that USPS has contributed a sufficient amount, or, possibly, more than 

enough, toward plan assets that will pay USPS retirees? 

Agency Comments USPS provided oral comments that substantially agreed with our report. 

Matters of emphasis and points of clarity recommended by USPS have been 

reflected in this report, as appropriate. OPM provided written comments 

that are reprinted in appendix IV, along with our comments. 

We are sending copies of this report to the Chairmen and Ranking Minority 

Members of the House and Senate Committees on Appropriations, the 

Postmaster General, the Chairman of the Postal Board of Governors, the 

Chairman of the Postal Rate Commission, the Chief Financial Officer of the 
Page 23 GAO-02-170 United States Postal Service

U.S. Postal Service, the Director of the Office of Personnel Management, 

and interested congressional committees. We will also provide copies to 

others on request.

If you have any questions on this report, please contact me at (202) 512-

2600 or Jeanette M. Franzel, Acting Director, at (202) 512-9471. We can also 

be reached by e-mail at steinhoffj@gao.gov or franzelj@gao.gov, 

respectively. Joseph Applebaum, Senior Actuary, Michael Fischetti, Meg 

Mills, John Sawyer, and Fred Evans were key contributors to this report.

Jeffrey C. Steinhoff

Managing Director

Financial Management and Assurance
Page 24 GAO-02-170 United States Postal Service

Appendix I

USPS Total Annual Retirement Plan Costs ApApenednxidexiIs

Dollars in millions

Fiscal Year CSRS

FERS

(including

TSP)

CSRS

Offset

Social

Security

CSRS pay

increases

Annuitant

COLA Total

1972 $446 - - $ 13 $ 63 - $ 522

1973 452 - - 12 115 - 579

1974 517 - - 14 176 - 707

1975 545 - - 14 207 - 766

1976 617 - - 17 385 - 1,019

1977 627 - - 16 507 - 1,150

1978 655 - - 15 470 - 1,140

1979 736 - - 16 658 - 1,410

1980 782 - - 16 697 - 1,495

1981 801 - - 17 722 - 1,540

1982 868 - - 16 850 - 1,734

1983 887 - - 18 967 - 1,872

1984 897 - - 46 917 - 1,860

1985 1,008 - - 168 1,355 - 2,531

1986 1,005 - $187 277 1,353 - 2,822

1987 982 $ 447 76 343 1,353 - 3,201

1988 996 792 20 426 1,618 - 3,852

1989 977 927 27 523 1,618 - 4,072

1990 940 1,064 28 607 1,659 - 4,298

1991 917 1,222 29 695 1,775 $420 5,058

1992 942 1,337 31 742 1,896 490 5,438

1993 828 1,397 31 854 1,938 551 5,599

1994 830 1,570 34 950 1,996 620 6,000

1995 843 1,670 34 1,008 2,132 689 6,376

1996 877 1,962 36 1,082 2,361 750 7,068

1997 870 2,142 36 1,162 2,396 817 7,423

1998 849 2,248 36 1,241 2,448 859 7,681

1999 816 2,505 35 1,337 2,505 903 8,101

2000 795 2,694 36 1,427 2,597 980 8,529

2001 771 2,918 34 1,531 2,433 1,398 9,085

2002 749 3,160 33 1,643 2,407 1,366 9,358

2003 727 3,425 32 1,762 2,447 1,425 9,818

2004 705 3,713 31 1,892 2,449 1,509 10,299
Appendix I

USPS Total Annual Retirement Plan Costs

Page 25 GAO-02-170 United States Postal Service

Source: USPS data (not independently verified by GAO).

2005 684 4,027 30 2,031 2,515 1,577 10,864

2006 664 4,369 29 2,179 2,372 1,647 11,260

2007 644 4,743 28 2,338 2,424 1,722 11,899

2008 625 5,150 28 2,509 2,476 1,833 12,621

2009 607 5,595 27 2,693 2,370 1,982 13,274

2010 589 6,080 26 2,889 2,282 2,164 14,030

(Continued From Previous Page)

Dollars in millions

Fiscal Year CSRS

FERS

(including

TSP)

CSRS

Offset

Social

Security

CSRS pay

increases

Annuitant

COLA Total
Page 26 GAO-02-170 United States Postal Service

Appendix II

USPS Retirement Liability for Employees’ Pay 

Increases ApendxiI

Source: USPS data (not independently verified by GAO).

Dollars in thousands

Payments

Year

Additional

liability Principal Interest Total

Ending

balance

1972 $ 1,016,736 $ 62,991 $ 62,991 $ 953,745

1973 677,824 57,298 $57,293 114,591 1,574,271

1974 1,117,000 95,471 80,814 176,285 2,595,800

1975 536,784 77,651 129,790 207,441 3,054,933

1976 2,880,330 232,294 152,747 385,041 5,702,969

1977 1,038,661 159,544 347,684 507,228 6,582,086

1978 809,164 148,088 322,319 470,407 7,243,162

1979 2,637,358 308,707 349,086 657,793 9,571,813

1980 632,661 234,367 462,712 697,079 9,970,107

1981 522,697 228,686 493,527 722,213 10,264,118

1982 1,825,052 341,930 508,269 850,199 11,747,240

1983 1,207,506 346,436 620,539 966,975 12,608,310

1984 362,692 291,969 625,438 917,407 12,679,033

1985 5,624,794 697,660 657,741 1,355,401 17,606,167

1986 945,930 472,748 880,308 1,353,056 18,079,349

1987 803,332 449,089 903,967 1,353,056 18,433,592

1988 2,653,868 697,467 920,508 1,617,975 20,389,993

1989 811,411 598,012 1,019,500 1,617,512 20,603,392

1990 661,998 628,355 1,030,170 1,658,525 20,637,035

1991 1,882,813 743,320 1,031,852 1,775,172 21,776,528

1992 1,900,849 804,504 1,091,282 1,895,786 22,872,873

1993 731,492 794,612 1,143,644 1,938,256 22,809,753

1994 930,608 855,421 1,140,489 1,995,910 22,884,940

1995 2,198,945 986,887 1,145,346 2,132,233 24,096,998

1996 3,696,728 1,156,628 1,204,853 2,361,481 26,637,098

1997 559,636 1,064,074 1,331,855 2,395,929 26,132,660

1998 835,936 1,141,085 1,306,634 2,447,719 25,827,511

1999 931,623 1,214,016 1,291,374 2,505,390 25,545,118

2000 1,639,396 1,327,314 1,270,150 2,597,464 26,139,593
Page 27 GAO-02-170 United States Postal Service

Appendix III

USPS Retirement Liability for Cost of Living 

Adjustments ApendxiI

Source: USPS data (not independently verified by GAO).

Dollars in thousands

Payments

Year

Additional

liability Principal Interest Total

Ending

balance

1990 $486,470 - - - $486,470

1991 2,885,841 $306,225 $114,740 $420,965 3,066,086

1992 831,703 337,473 152,872 490,345 3,560,316

1993 729,650 372,711 178,017 550,728 3,917,255

1994 868,695 424,171 195,864 620,035 4,361,779

1995 971,513 470,585 218,093 688,678 4,862,707

1996 951,246 506,725 243,138 749,863 5,307,228

1997 1,041,176 551,926 265,364 817,290 5,796,478

1998 789,604 569,316 289,824 859,140 6,016,766

1999 537,246 601,895 300,839 902,734 5,952,117

2000 1,056,225 682,632 297,593 980,225 6,325,710
Page 28 GAO-02-170 United States Postal Service

Appendix IV

Comments From the Office of Personnel 

Management ApendxiIV

See comment 1.
Appendix IV

Comments From the Office of Personnel 

Management

Page 29 GAO-02-170 United States Postal Service

See comment 2.

See comment 3.
Appendix IV

Comments From the Office of Personnel 

Management

Page 30 GAO-02-170 United States Postal Service

The following are GAO’s comments on the Office of Personnel 

Management’s letter dated November 23, 2001.

GAO Comments 1. The “fine tuning” items were not included in the report because the 

amounts were paid to OPM by fiscal year 1998 and are no longer 

outstanding liabilities of the Postal Service.

2. Our report has been revised to reflect that the Board of Actuaries of 

CSRS determined the 5-percent discount rate used in the amortization 

tables to calculate payments to be made to OPM.

3. Our Senior Actuary agreed with the OPM comment; therefore, we have 

deleted the sentence from our report.

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