U.S. POSTAL 

SERVICE

Status, Financial 

Outlook, and 

Alternative 

Approaches to Fund 

Retiree Health 

Benefits

Report to the Chairman, Committee on 

Oversight and Government Reform, 

House of Representatives

December 2012

GAO-13-112

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-13-112, a report to the 

Chairman, Committee on Oversight and 

Government Reform, U.S. House of 

Representatives

December 2012

U.S. POSTAL SERVICE

Status, Financial Outlook, and Alternative 

Approaches to Fund Retiree Health Benefits

Why GAO Did This Study

PAEA required USPS to prefund its 

future retiree health benefits as part of 

comprehensive postal reform by 

establishing the PSRHBF along with 

an initial target period to fund the 

unfunded liability in 50 years. This 

requirement included annual payments 

to this fund from 2007 to 2016 of 

between $5.4 billion to $5.8 billion. 

USPS, its employee groups, and 

others have argued that this prefunding 

requirement is a major source of 

USPS’s financial woes—reported by 

USPS as contributing $32 billion 

toward its $41 billion of net losses over 

the past 6 years. USPS defaulted on 

the last 2 years of PSRHBF payments 

totaling $11.1 billion.

As requested, this report addresses 

the (1) status and financial outlook of 

the PSRHBF, (2) impact on future 

annual USPS payments and unfunded 

liabilities of alternative approaches, 

and (3) key considerations for 

policymakers. GAO reviewed and 

summarized PSRHBF financial data 

and analyzed and compared current 

law requirements with five alternative 

approaches by developing projections 

based on OPM and USPS data. 

What GAO Recommends

GAO is not making new 

recommendations in this report, as it 

has already reported on strategies and 

options for USPS to achieve 

sustainable financial viability. In 

commenting on a draft of this report, 

USPS and the USPS Office of 

Inspector General stated that USPS 

could not afford to prefund. USPS has 

stated that any discussion of 

PSRHBF’s outlook must consider 

USPS’s proposed health plan. GAO is 

currently reviewing this proposal.

What GAO Found

The Postal Service Retiree Health Benefits Fund (PSRHBF) covered about 49 

percent of the U.S. Postal Service’s (USPS) $94 billion retiree health benefit 

liability at fiscal year-end 2012. USPS’s deteriorating financial outlook, however,

will make it difficult to continue the current prefunding schedule in the short term, 

and possibly to fully fund the remaining $48 billion unfunded liability over the 

remaining 44 years of the schedule on which the 2006 Postal Accountability and 

Enhancement Act (PAEA) was based. The liability covers the projected benefits 

for about 471,000 current postal retirees and a portion of the projected benefits 

for about 528,000 current employees; it does not cover employees not yet hired. 

Under PAEA, USPS is responsible for contributing an additional $33.9 billion to 

the PSRHBF by fiscal year 2017, including the $11.1 billion USPS has defaulted 

on over the past 2 years. PAEA also requires the Office of Personnel 

Management (OPM) to calculate the remaining unfunded liability in 2017 and 

develop an initial 40-year amortization payment schedule. USPS, however, 

projects further declines in mail volume and revenues that may continue to limit 

its ability to prefund the remaining retiree health benefit liability. 

GAO’s analysis of maintaining current law requirements compared to five

alternative approaches showed differing impacts on USPS’s future annual 

payments and unfunded liabilities. For example, three of the approaches—1) the 

Administration’s Approach, 2) Senate Bill (S. 1789) and 3) “Pay-as-You-Go” (no 

prefunding)—would reduce USPS’s annual payments in the short term, thereby 

easing its immediate cash flow problems and financial losses. However, these 

approaches would increase USPS’s unfunded liability, sometimes substantially, 

and require larger payments later. Deferring funding could increase costs for 

future ratepayers and increase the possibility that USPS may not be able to pay 

for some or all of its liability. Conversely, a fourth approach—the House Bill (H.R. 

2309)—and the current law requirement would reduce USPS’s unfunded 

liabilities more aggressively but may result in significantly higher USPS financial 

losses in the near future. If USPS stopped prefunding and let the existing fund 

grow with interest, the unfunded liability is projected to significantly increase. 

Under a fifth approach, if USPS stopped prefunding and used the existing fund to 

pay current and future premiums, the fund is projected to be exhausted by 2026. 

Private sector, state, local, and other federal entities are not required to prefund 

these benefits, though some do so to a limited extent, and most are required to 

recognize the future costs in their financial reporting. 

GAO identified several key considerations including: (1) the rationale and 

consequences of prefunding such benefits; (2) trade-offs affecting USPS’s 

financial condition, such as sizes of the annual payments and unfunded liability; 

(3) fixed versus actuarially determined payments; (4) targeted funding levels; and 

(5) assumption criteria. USPS is intended to be a self-sustaining entity funded 

almost entirely by postal ratepayers, but its financial losses are challenging its 

sustainability. GAO has testified that USPS should prefund its retiree health 

benefit liabilities to the maximum extent that its finances permit, but none of the 

funding approaches may be viable unless USPS has the ability to make the 

payments. USPS’s default on its last two required PSRHBF payments and its 

inability to borrow further make the need for a comprehensive package of actions 

to achieve sustainable financial viability even more urgent.

View GAO-13-112. For more information, 

contact Frank Todisco at todiscof@gao.gov or 

Lorelei St. James at stjamesl@gao.gov or call 

(202) 512-2834. 
Page i GAO-13-112 U.S. Postal Service

Letter 1 

Background 4

Status and Financial Outlook of the PSRHBF 12

USPS’s Future Payments and Unfunded Liabilities Vary Widely 

Based on Approaches to Fund Retiree Health Benefits 15

Short-term Effects 19

Long-term Effects 22

Key Considerations for Assessing Funding Approaches 40

Concluding Observations 48

Agency Comments and Our Evaluation 50

Appendix I Objectives, Scope, and Methodology 55

Appendix II Projected Results Using Senate Bill Assumption Basis 62

Appendix III Comments from the U.S. Postal Service 68

Appendix IV Comments from the U.S. Postal Service, Office of 

Inspector General 69

Appendix V GAO Contact and Staff Acknowledgments 72

Tables

Table 1: PSRHBF Payments and Fund Status as of September 30,

201214

Table 2: Key Features of Current Law and Alternative Approaches 

for Prefunding USPS Retiree Health Benefits 18

Table 3: Estimated Annual Payments and Unfunded Liabilities in 

the Short Term (Fiscal Years 2013 to 2020) under Current 

Law Assumption Basis 20

Table 4: Estimated Annual Payment and Unfunded Liability in the 

Long Term (in Fiscal Year 2040, the Last Year of the 

Projection) under Current Law Assumption Basis 23

Contents 
Page ii GAO-13-112 U.S. Postal Service

Table 5: Key Differences between the Two sets of PSRHBF 

Funding Assumptions, as of September 30, 2011 32

Table 6: Sensitivity of Fiscal Year-end 2011 Unfunded Liability to 

One-Percentage-Point Change in Medical Inflation 

Assumption 37

Table 7: Estimated Annual Payments and Unfunded Liabilities in 

the Short Term (Fiscal Years 2013 to 2020) under Senate 

Bill Assumption Basis 62

Table 8: Annual Payment and Unfunded Liability in the Long Term 

(in Fiscal Year 2040, the Last Year of the Projection) under 

Senate Bill Assumption Basis 64

Figures

Figure 1: USPS Net Operating Profit and Loss, Fiscal Years 2006 to 

2012 9

Figure 2: USPS’s First-Class Mail Volume Forecast, Fiscal Years 

2013 to 2020 10

Figure 3: USPS Retiree Health Benefits Fund’s Sources as of 

September 30, 2012 13

Figure 4: Estimated Annual Payments for Different Approaches 

from Fiscal Year 2013 to Fiscal Year 2020 under Current 

Law Assumption Basis 22

Figure 5: Estimated Annual Payments (as a Percentage of 

Compensation) for Different Approaches from Fiscal Year 

2013 to Fiscal Year 2040 under Current Law Assumption 

Basis 26

Figure 6: Estimated Unfunded Liability (as a Percentage of USPS’s 

Annual Compensation Costs) for Different Approaches 

from Fiscal Year-end 2012 to Fiscal Year-end 2040 under 

Current Law Assumption Basis 28

Figure 7: Estimated Funded Ratios for Different Approaches from 

Fiscal Year-end 2012 to Fiscal Year-end 2040 under 

Current Law Assumption Basis 29

Figure 8: Estimated Annual Payments for Modified Senate 

Prefunding Approach from Fiscal Year 2013 to Fiscal Year 

2020 under Current Law Assumption Basis and Senate Bill 

Assumption Basis 34

Figure 9: Estimated Annual Payments (as a Percentage of 

Compensation) for Modified Senate Prefunding Approach 

from Fiscal Year 2013 through Fiscal Year 2040 under 
Page iii GAO-13-112 U.S. Postal Service

Current Law Assumption Basis and Senate Bill 

Assumption Basis 35

Figure 10: Estimated Annual Payments for Different Approaches 

from Fiscal Year 2013 to Fiscal Year 2020 under Senate 

Bill Assumption Basis 63

Figure 11: Estimated Annual Payments (as a Percentage of 

Compensation) for Different Approaches from Fiscal Year 

2013 to Fiscal Year 2040 under Senate Bill Assumption 

Basis 65

Figure 12: Estimated Unfunded Liability (as a Percentage of USPS’s 

Annual Compensation Costs) for Different Approaches 

from Fiscal Year-end 2012 to Fiscal Year-end 2040 under 

Senate Bill Assumption Basis 66

Figure 13: Estimated Funded Ratios for Different Approaches from 

Fiscal Year-end 2012 to Fiscal Year-end 2040 under Senate 

Bill Assumption Basis 67
Page iv GAO-13-112 U.S. Postal Service

Abbreviations 

CSRDF Civil Service Retirement and Disability Fund

CSRS Civil Service Retirement System 

DOD Department of Defense 

FASAB Federal Accounting Standards Advisory Board

FASB Financial Accounting Standards Board

FEHBP Federal Employees Health Benefits Program 

FERS Federal Employees Retirement System

FTE full-time employees 

GASB Governmental Accounting Standards Board

IG Inspector General

OIG Office of Inspector General

OPEB other post-employment benefits

OPM Office of Personnel Management 

PAEA Postal Accountability and Enhancement Act (2006)

PRC Postal Regulatory Commission 

PSRHBF Postal Service Retiree Health Benefits Fund 

PVB present value of future benefits 

SFFAS 33 Statement of Federal Financial Accounting Standards 

 No. 33

S&P Standard & Poor’s 

USPS U.S. Postal Service

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Page 1 GAO-13-112 U.S. Postal Service

United States Government Accountability Office

Washington, DC 20548

December 4, 2012

The Honorable Darrell E. Issa

Chairman

Committee on Oversight and Government Reform

House of Representatives 

Dear Mr. Chairman:

Because of significant financial difficulties, the U.S. Postal Service 

(USPS) was unable to make its statutorily required payments of $5.5 

billion in fiscal year 2011 and $5.6 billion in fiscal year 2012 to prefund 

retiree health benefits.

1 The Postal Accountability and Enhancement Act 

(PAEA) required USPS to make fixed annual payments to begin 

prefunding the cost of future retiree health benefits accrued by current 

employees and retirees.2 The act required annual payments (ranging 

from $5.4 billion to $5.8 billion per year) from fiscal years 2007 through 

2016 to be deposited into a new fund established in the U.S. Treasury 

and administered by the Office of Personnel Management (OPM) called 

the Postal Service Retiree Health Benefits Fund (PSRHBF). During this 

period, USPS would also make annual payments for its share of health 

benefit premiums for current retirees to the Federal Employees Health 

Benefits Fund (this payment amounted to $2.5 billion in fiscal year 2012).3

 

1

Originally due at the end of fiscal year 2011, USPS’s $5.5 billion retiree health benefit 

payment requirement was delayed until August 1, 2012. Pub. L. No. 112-74, § 632, 125 

Stat. 786, 928 (Dec. 23, 2011). USPS missed that payment as well as the $5.6 billion that 

was due by September 30, 2012.

Beginning in fiscal year 2017, USPS’s share of health benefit premiums 

for retirees is to be paid from the PSRHBF rather than by USPS. PAEA 

further required that beginning in fiscal year 2017, USPS’s contributions 

to the PSRHBF are to be based on actuarial calculations performed by 

OPM. USPS’s actuarially determined annual contribution to the PSRHBF 

is to consist of a payment for the cost of future benefits attributable to 

2

Pub. L. 109-435, § 803, 120 Stat. 3198 (Dec. 20, 2006).

3

For the purposes of this report, payments made by USPS refer to payments from the 

Postal Service Fund. The Postal Service Fund is a revolving fund established in the U.S. 

Treasury for the deposit of all revenues, interest, appropriations, proceeds from borrowing, 

or any other receipts from USPS’s operations. The Fund is available to USPS to carry out 

the purposes, functions, and powers of USPS. 39 U.S.C. § 2003. 

 
 

Page 2 GAO-13-112 U.S. Postal Service

employee service during the fiscal year, plus a payment to fund the 

remaining unfunded retiree health benefit liability over a statutorily 

determined amortization schedule that initially extends 40 years to 2056.4

USPS, employee organizations, and other stakeholders have argued that 

the prefunding requirement is a major contributor to USPS’s financial 

decline—contributing $32 billion towards its $41 billion of net losses over 

the past 6 years5

—and that Congress should relieve USPS from these 

prefunding requirements or substantially reduce them. As of the end of 

fiscal year 2012, OPM estimated that USPS’s total health benefit liability 

for future and current retirees6

 

4

Pursuant to PAEA, no later than June 30, 2017, OPM is required to compute, and by 

June 30 of each succeeding year, to recompute, a series of annual installments which 

provide for the liquidation of any liability or surplus by September 30, 2056, or within 15 

years, whichever is later. 5 U.S.C. § 8909a(d)(2)(B). OPM told us it calculates these 

payments by determining the amount that, if contributed every year, would be projected to 

fully fund the remaining unfunded liability over an amortization period ending in the later of 

fiscal year 2056, or 15 years subsequent to the then-current fiscal year. 

was approximately $94 billion—of which 

$48 billion was unfunded and $46 billion was in the PSRHBF. We have 

previously reported that USPS cannot be financially viable until Congress 

and USPS address the cash flow problems that limit its immediate 

prefunding capability while also addressing how to pay for the long-term 

cost of USPS’s unfunded retiree health benefit liability. Projected declines 

in mail volumes and revenues will continue to exacerbate USPS’s 

difficulties in paying for the cost of its retiree health benefits.

5

The $41 billion dollars in net losses for fiscal years 2007 through 2012 are those reported 

by USPS in its financial reporting, which is on an accrual basis and not a cash basis.

However, USPS reports its retiree health benefits cost in a manner that its reported 

expense for these benefits is equal to its required cash payments, as discussed later in 

this report.

6

The retiree health benefit liability represents the actuarial present value of the cost of the 

portion of future retiree health premiums for which USPS is responsible and that are 

attributable to past service; this liability reflects all such projected future costs for current 

retirees and beneficiaries and a portion of such projected future costs for current workers.

Actuarial present values of this type, whether for retiree health benefits or pension 

benefits, are variously referred to as a “liabilities,” “accrued liabilities,” or “obligations,” 

often depending on the user of the term (e.g., actuaries, accountants, or lawyers) and the 

context (e.g., financial reporting, statutes, or media). Throughout this report, we use the 

terms “liability” to refer to this actuarial present value of future costs attributable to past

service and “unfunded liability” to refer to the excess of this liability over the amount of 

funds in the PSRHBF. 
 

Page 3 GAO-13-112 U.S. Postal Service

Several approaches proposed by the Administration (Administration) and 

congressional committees offer alternatives that would revise USPS’s 

prefunding payments and affect the amount of funds deposited in the 

PSRHBF to make future retiree health premium payments. In addition, 

USPS’s Office of Inspector General (OIG) has analyzed a proposal to 

suspend prefunding and let the existing fund grow with interest. Some 

have also suggested that prefunding is unnecessary, inadvisable, or 

unfair. You requested that we review the PSRHBF and study the effects 

of multiple proposals to revise the payment structure for funding retiree 

health benefits, which include reducing or deferring payments in the short 

term, as well as eliminating prefunding altogether. This report (1) 

describes the status and financial outlook of the Postal Service Retiree 

Health Benefits Fund, (2) analyzes how alternative approaches for 

funding retiree health benefits could affect future USPS payments and 

unfunded liabilities, and (3) determines key considerations for 

policymakers assessing the alternative approaches.

USPS has also proposed withdrawing from the Federal Employees 

Health Benefits Program (FEHBP) and administering its own health care 

plan for its employees and retirees. This report looks at retiree health

benefits funding options assuming that USPS continues to participate in 

FEHBP under current provisions. We will be issuing a separate report on 

USPS’s proposal to administer its own health care plan.

To describe the status and financial outlook of the PSRHBF, we reviewed 

and summarized USPS financial data regarding payments made to the 

fund, interest earned from such contributions, overall fund balance, and 

retiree health benefit liability. We also reviewed our prior work and 

reviewed and summarized reports and data from USPS and others on 

how USPS’s financial condition has changed since 2006. We reviewed 

relevant statutes, proposed legislation, and sections of the President’s 

budget request for fiscal year 2012 pertaining to USPS’s health and 

pension benefit programs. We also interviewed USPS and OPM officials 

on the status and financial outlook of the PSRHBF. To analyze how 

alternative proposals for funding retiree health benefits could affect future 

USPS payments and unfunded liabilities, we analyzed and compared 

current law requirements and five alternative approaches. The alternative 

approaches included an approach contained in a bill passed by the 

Senate, an approach contained in a bill approved by a House committee, 

an Administration proposal, an approach analyzed by the USPS OIG, and 

a pay-as-you-go method with no prefunding. We obtained data from 

USPS on current and projected full-time employee (FTE) counts and 

compensation. In addition, we met with OPM officials to discuss actuarial 
 

Page 4 GAO-13-112 U.S. Postal Service

assumptions and the methodology for projecting future actuarial costs 

and premium payment levels under different sets of assumptions, using 

the workforce projections provided by USPS. We used the projections 

provided by OPM and USPS to calculate, for each of the alternative 

approaches to prefunding, USPS’s required payments and the PSRHBF’s 

unfunded liability through fiscal year 2040. To determine key factors for 

policymakers to consider when assessing alternative approaches, we 

used our own actuarial judgment and expertise. In addition, for 

comparison purposes we examined the prefunding requirements and 

prefunding behavior of private-sector entities, state and local 

governments, and other federal entities. We also looked at how these 

other entities, as well as USPS, recognize the cost of these benefits in 

their financial reporting based on relevant accounting standards 

promulgated by the Financial Accounting Standards Board (FASB), 

Governmental Accounting Standards Board (GASB), and Federal 

Accounting Standards Advisory Board (FASAB). For more information on 

our scope and methodology, see appendix I.

We conducted this performance audit from May 2012 to December 2012 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

USPS, an independent establishment of the executive branch, is intended 

to be a financially self-sufficient entity that covers its expenses almost 

entirely through postal revenues. In April 2001, we placed USPS on our 

high-risk list for two reasons.7

 

7

GAO, U.S. Postal Service: Transformation Challenges Present Significant Risks, 

First, in the short term, USPS’s ability to 

continue to fulfill its mission on a self-supporting basis was threatened 

because of projected annual losses of $2 billion to $3 billion, severe cash 

flow pressures, and debt approaching its statutory borrowing limit without 

any debt reduction plan. Second, in the long term, increasing retirementrelated expenses threatened to reduce USPS’s future cash flows and 

place upward pressures on postal rates.

GAO-01-598T (Washington, D.C.: Apr. 4, 2001).

Background 
 

Page 5 GAO-13-112 U.S. Postal Service

We have been reporting on USPS’s financial challenges, including those 

related to funding its retiree health benefit liability, over the past decade. 

In May 2002, the Comptroller General testified that USPS had about $100 

billion in liabilities, including an estimated $49 billion in unfunded retiree

health benefit liability.8 Unlike pension liabilities, USPS had been funding 

its retiree health benefit liability on a pay-as-you-go basis—an approach 

in which USPS paid its share of premiums for existing retirees, with no 

prefunding for any future premiums expected to be paid on behalf of 

current retirees and workers. In May 2003, the Comptroller General 

testified that USPS’s accounting treatment—which reflected the pay-asyou-go nature of its funding—did not reflect the economic reality of its 

legal liability to pay for its retiree health benefits, and that current 

ratepayers were not paying for the full costs of the services they were 

receiving. Consequently, the pension benefits being earned by USPS 

employees—which were being prefunded—were recovered through 

current postal rates, but the retiree health benefits of those same 

employees were not being recognized in rates until after they retired. The 

Comptroller General testified that without a change, a sharp escalation in 

postal rates in future years would be necessary to fund the cost of retiree 

health benefits on a pay-as-you-go basis.9

Two laws, enacted in 2003 and 2006, reformed USPS’s pension liabilities 

and required it to prefund retiree health benefits:

• The Postal Civil Service Retirement System Funding Reform Act of 

2003:

10

• changed USPS funding of its Civil Service Retirement System 

(CSRS)11 pension liabilities (based on “dynamic assumptions”12

 

8

GAO, U.S. Postal Service: Moving Forward on Financial and Transformation Challenges, 

) 

GAO-02-694T (Washington, D.C.: May 13, 2002). 

9

GAO, U.S. Postal Service: Key Postal Transformational Issues, GAO-03-812T

(Washington, D.C.: May 29, 2003). 

10Pub. L. No. 108-18, 117 Stat. 624 (April 23, 2003). 

11CSRS is a defined benefit, contributory retirement system for certain federal employees.

It was replaced by the Federal Employees Retirement System (FERS) for federal 

employees who first entered covered service on and after January 1, 1987. 
 

Page 6 GAO-13-112 U.S. Postal Service

while retroactively transferring responsibility for funding the cost of 

CSRS benefits attributable to the military service of postal 

employees from the U.S. Treasury to USPS; 

• required USPS to escrow the reduction in annual CSRS payments 

resulting from the funding changes in the act (about $3 billion); 

and

• required USPS to report to Congress on how it could use the 

CSRS savings realized after fiscal year 2005. USPS proposed to 

Congress in 2003 that the responsibility for funding the cost of 

CSRS benefits attributable to the military service of postal 

employees be transferred back to the U.S. Treasury and that it 

use the resulting savings to prefund its retiree health benefit 

liability. 

• PAEA, enacted in 2006,

13

• transferred all responsibility for costs related to CSRS military 

service credit from USPS back to the U.S. Treasury, both 

retroactively and prospectively; this included all CSRS military 

service costs for postal employees since the inception of the 

Postal Service in 1971;

14

• established the PSRHBF to begin prefunding the health benefits 

of current and future postal retirees and transferred about $20 

billion of “start-up” funds into the PSRHBF ($3 billion from the 

discontinued CSRS escrow—as USPS’s annual CSRS payment 

was suspended—and $17 billion from the surplus in the CSRS 

fund); 

• required USPS to make annual payments ranging from $5.4 billion 

to $5.8 billion per year into the PSRHBF from fiscal years 2007 

 

12The 2003 Act required USPS to contribute the employer’s share of the “dynamic normal 

cost” (which is a normal cost computed using “dynamic assumptions”). The normal cost is 

the annual growth in pension liabilities resulting from an additional year of service by plan 

participants. “Dynamic assumptions” are defined as economic assumptions that are used 

in determining actuarial costs and liabilities in a retirement system and in anticipating the 

effects of long-term future investment yields, future increases in rates of basic pay, and 

future rates of price inflation. Pub. L. No. 108-18, § 2(a)(3) (Apr. 23, 2003). The priorfunding methodology had used “static assumptions,” which did not project future pay or 

cost-of-living increases and used a fixed interest-rate assumption. 

13Pub. L. No. 109-435, 120 Stat. 3198 (Dec. 20, 2006). 

14This shift created a postal actuarial funding surplus in CSRS of $17 billion, which was 

transferred to the PSRHBF. In addition, PAEA suspended USPS employer contributions to 

CSRS. Beginning in fiscal year 2017, if OPM determines a postal supplemental liability 

exists in CSRS, USPS must commence making annual employer contributions to CSRS in 

the following fiscal year.
 

Page 7 GAO-13-112 U.S. Postal Service

through 2016 to begin prefunding its retiree health benefit liability; 

and

• required OPM to calculate the remaining unfunded liability in 2017 

and each subsequent year, and to calculate an amortization 

payment based on an amortization period that extends to 2056 or, 

if later, 15 years from the then-current fiscal year.15

As a result, in 2007 USPS began prefunding its retiree health benefits as 

its CSRS pension liability was significantly reduced and its annual CSRS 

payment was suspended. USPS stated in its 2007 Annual Report that 

such prefunding was a farsighted and responsible action that placed 

USPS in the vanguard of both the public and private sectors in providing 

future security for its employees, and augured well for its long-term 

financial stability, but also acknowledged that the required payments 

would be a considerable financial challenge in the near term.16

We testified in April 2007 that we had removed USPS from our high-risk 

list due in part to USPS’s financial improvements resulting from these 

congressional actions.

Contrary 

to statements made by some employee groups and other stakeholders, 

PAEA did not require USPS to prefund 75 years of retiree health benefits 

over a 10-year period. Rather, pursuant to OPM’s methodology, such 

payments would be projected to fund the liability over a period in excess 

of 50 years, from 2007 through 2056 and beyond (with rolling 15-year 

amortization periods after 2041). However, the payments required by 

PAEA were significantly “frontloaded,” with the fixed payment amounts in 

the first 10 years exceeding what actuarially determined amounts would 

have been using a 50-year amortization schedule.

17

 

15OPM told us it calculates these payments by determining the amount that, if contributed 

every year, would be projected to fully fund the remaining unfunded liability over an 

amortization period ending in the later of fiscal year 2056, or 15 years subsequent to the 

then-current fiscal year. Therefore, for years subsequent to 2041, OPM would calculate an 

amortization amount that would be sufficient to liquidate the unfunded liability (or surplus) 

over the next 15 years. For example, in 2050, OPM would calculate an amortization 

amount that would be sufficient to liquidate the unfunded liability (or surplus) by 2065. This 

“rolling” amortization approach would never fully liquidate the unfunded liability (if 

experience matched the actuarial assumptions), but could be expected to approach full 

funding sufficiently closely.

From fiscal years 2003 to 2005, USPS’s annual 

16USPS, United States Postal Service Annual Report 2007, (Washington, D.C.: Nov. 15, 

2007). 

17GAO, U.S. Postal Service: Postal Reform Law Provides Opportunities to Address Postal 

Challenges, GAO-07-684T (Washington, D.C.: Apr.17, 2007). 
 

Page 8 GAO-13-112 U.S. Postal Service

pension expense declined by $9 billion. USPS had repaid over $11 billion 

of outstanding debt, reported $5.4 billion in cost savings and record high 

net incomes, and delayed rate increases from fiscal year 2003 until 

January 2006.

Since fiscal year 2007, however, USPS has experienced significant 

financial challenges. USPS’s gap between expenses and revenues has 

grown significantly, as shown in figure 1. In addition, USPS’s outstanding 

debt to the U.S. Treasury increased from $2.1 billion at fiscal year-end 

2006 to its current statutory-borrowing limit of $15 billion.18 In fiscal year 

2009, we returned USPS to our high-risk list due, in part, to a projected 

loss of $7 billion—and an actual loss of over $8.5 billion—in fiscal year 

2010. For fiscal year 2012, USPS had a net loss of almost $16 billion, 

which included $11.1 billion for required PSRHBF prefunding payments 

that USPS did not make.19

 

1839 U.S.C. § 2005(a)(2). 

Furthermore, USPS’s future financial outlook 

is bleak as it projects further declines in mail volume and revenue by 

fiscal year 2020.

19Even though USPS did not make these payments, it recorded a loss for the obligation to 

make these payments, which remains outstanding. 
 

Page 9 GAO-13-112 U.S. Postal Service

Figure 1: USPS Net Operating Profit and Loss, Fiscal Years 2006 to 2012 

USPS projects that First-Class Mail—which is highly profitable and 

generated about 44 percent of USPS’s revenue in fiscal year 2012—will 

decline in volume by about 42 percent by fiscal year 2020, as shown in 

figure 2. During the economic downturn, there has been an accelerated 

diversion of business and individual mail to electronic alternatives, and 

some businesses have left the mail entirely. USPS further projects that an 

economic recovery will not bring a corresponding recovery in mail volume 

because of continuing social and technological trends that have changed 

the way that people communicate and use the mail. USPS has several 

initiatives to generate new revenue; however, such efforts are unlikely to 

generate enough revenue in time to offset the projected decline in mail 

volume.20

 

20We have ongoing work reviewing USPS’s efforts in these areas.

Limited increases in revenue require USPS to seek aggressive 

cost-saving initiatives to achieve financial stability.
 

Page 10 GAO-13-112 U.S. Postal Service

Figure 2: USPS’s First-Class Mail Volume Forecast, Fiscal Years 2013 to 2020

In February 2012, USPS announced a plan that included a goal of 

achieving $22.5 billion in annual cost savings by the end of fiscal year 

2016. The plan included changes in USPS’s mail processing and 

transportation networks and other cost-saving initiatives, as follows:

• $9 billion in network operations, of which $4 billion would come from 

consolidating its mail processing and transportation networks;

• $5 billion in compensation and benefits; and

• $8.5 billion through legislative changes, such as moving to a 5-day 

delivery schedule.

At the same time, USPS’s plan would also reduce the overall size of the 

postal workforce by roughly 155,000 career employees, with many of 

those reductions expected to result from attrition. USPS reports in the 

plan that half of its current career employees—283,000 employees—will 

be retirement eligible by 2016. In March 2010, USPS presented a detailed 

proposal to the Postal Regulatory Commission (PRC) to move from a 6-

day to a 5-day delivery schedule to achieve its workforce-reduction and 
 

Page 11 GAO-13-112 U.S. Postal Service

cost-savings goals.21 USPS projected that its proposal to move to 5-day 

delivery by ending Saturday delivery would save about $3 billion annually 

and would reduce mail volume by less than 1 percent. However, on the 

basis of its review, PRC estimated a lower annual net savings—about 

$1.7 billion after a 3-year phase-in period—as it noted that higher revenue 

losses were possible.22

As noted earlier, USPS has also proposed withdrawing from the Federal 

Employees Health Benefits Program (FEHBP) and administering its own 

health care plan for its employees and retirees. This report looks at retiree 

health benefit funding options assuming that USPS continues to 

participate in FEHBP under current provisions. Adoption of any of the 

funding approaches analyzed in this report would not by itself preclude 

USPS from continuing to pursue its proposal to administer its own plan. If 

USPS’s proposal was adopted and if it was expected to result in cost 

savings, these projected savings would be reflected in a lower liability, a 

lower unfunded liability, and lower prefunding contributions than 

otherwise.

In February 2012, USPS updated its projected net 

savings from 5-day delivery to $2.7 billion after a 3-year implementation 

period.

23

Related to whether USPS should prefund retiree health benefits, some 

stakeholders have argued that such prefunding is primarily responsible 

for USPS’s dismal financial condition and is unfair, arguing that no other 

entity is required to conduct such prefunding. According to a 2011 OPM 

Inspector General (OIG) report, however, postponing prefunding 

 We will be issuing a separate report evaluating USPS’s 

proposal to administer its own health care plan.

 

21USPS’s annual appropriations acts have required USPS to provide 6-day delivery of 

mail at not less than 1983 levels. See e.g., Pub. L. No. 112-74, 125 Stat. 786, 923 (Dec. 

23, 2011). 

22PRC noted that USPS improperly deflated mailers’ reported volume-reduction 

projections and that the reported declines should not have been reduced, and determined, 

based on USPS’s survey data, that it is likely to lose almost $600 million in net revenue 

because of mailer response to the proposal. See Postal Regulatory Commission, Advisory 

Opinion on Elimination of Saturday Delivery, Docket No. N2010-1 (Washington, D.C.: Mar. 

24, 2011). 

23As discussed later in this report, under some of the prefunding approaches, 

contributions would be lower than otherwise only in fiscal years 2017 and later, when 

contributions are determined on an actuarial basis. 
 

Page 12 GAO-13-112 U.S. Postal Service

(deferring payments until later) is financially risky.24 OPM’s Inspector 

General reported that future USPS customers (ratepayers) will have to 

pay for expenses that the USPS is incurring today and added that 

deferring payments will likely hurt the USPS’s ability to compete in the 

future and affect its ability to improve its financial situation. The report 

added that USPS would lose the benefit of the interest that its deposits 

into the funds would have otherwise earned. This interest would have 

reduced USPS’s future unfunded liabilities for these benefits. 

Consequently, postponing prefunding would require the USPS to make 

larger contributions in the future.

At the end of fiscal year 2012, OPM estimated that USPS’s total retiree 

health benefit liability was almost $94 billion, whereas the PSRHBF 

balance was about $46 billion (49 percent), leaving USPS with an 

unfunded liability of about $48 billion. Approximately half of the $94 billion 

liability is for retired annuitants and their survivors while the other half is 

for current career employees. At fiscal year-end 2012, USPS had about 

471,000 annuitants and survivors who were receiving retiree health 

benefit coverage and about 528,000 career-employees who could 

become eligible for such coverage when they retire.25

PSHRBF’s balance comes from three sources. USPS’s annual prefunding 

payments have accounted for $17.9 billion, or 39 percent, of the PSRHBF 

balance as of September 30, 2012.The remaining balance consists of 

about $20 billion transferred from USPS’s excess CSRS funds (referred 

to as “start-up funds” in figure 3 below) when the PSRHBF was created in 

2007 and approximately $7.8 billion in earned interest (see figure 3).

The liability for 

current employees is a portion of the ultimate liability for their future 

retiree benefits; the liability accrues steadily over their working years, 

from zero at date of entry into FEHBP to the full liability at retirement.

Contrary to some claims, there is no liability held, nor contributions made, 

for any future employees who have yet to be hired or yet to be born.

 

24OPM Office of Inspector General, A Study of the Risks and Consequences of the USPS 

OIG’s Approaches to Change USPS’s Funding of Retiree Benefits (Washington, D.C.: 

February 28, 2011). 

25OPM officials told us that not all USPS career employees are in FEHBP, such as those 

employees covered through another plan, (e.g., a spouse’s employee health plan) or 

those who simply do not participate in FEHBP. Officials added that USPS’s participation 

rate of eligible employees is generally about 90 percent. 

Status and Financial 

Outlook of the 

PSRHBF
 

Page 13 GAO-13-112 U.S. Postal Service

Figure 3: USPS Retiree Health Benefits Fund’s Sources as of September 30, 2012

Note: Start-up funds included about $3 billion from the CSRS escrow and about $17 billion from a 

surplus in the CSRS fund.

Because of USPS’s financial difficulties, however, USPS has not made all 

of its required prefunding payments. Under PAEA, USPS is still 

responsible for contributing an additional $33.9 billion to the PSRHBF by 

fiscal year 2017 as shown in table 1, including $11.1 billion that USPS 

has defaulted on over the past 2 years. Originally due at the end of fiscal 

year 2011, USPS’s $5.5 billion required retiree health prefunding payment 

was delayed until August 1, 2012.26 USPS missed that payment as well 

as the $5.6 billion that was due by September 30, 2012.

 

26Pub. L. No. 112-74, § 632. 
 

Page 14 GAO-13-112 U.S. Postal Service

Table 1: PSRHBF Payments and Fund Status as of September 30, 2012

Dollars in billions

CSRS start-upa $20

USPS prefunding payments made

Fiscal year 2007 $5.4

Fiscal year 2008 $5.6

Fiscal year 2009b $1.4

Fiscal year 2010 $5.5

Total USPS prefunding $17.9

PSRHBF earned interest $7.8

PSRHBF balance $45.7

Retiree health benefit liability $93.6

Unfunded liability $47.8

USPS outstanding mandated prefunding payments to PSRHBF

Fiscal year 2011c $5.5

Fiscal year 2012d $5.6

Fiscal year 2013 $5.6

Fiscal year 2014 $5.7

Fiscal year 2015 $5.7

Fiscal year 2016 $5.8

Total $33.9

Source: USPS.

Note: Totals may not add because of rounding. a

The start-up included $3 billion from the CSRS escrow and $17 billion from a surplus in the CSRS 

fund.

b

USPS’s required prefunding payment was reduced from $5.4 billion to $1.4 billion in 2009. Pub. L. 

No. 111-68, § 164(a) 123 Stat. 2023, 2053 (Oct.1, 2009). c

Originally due at the end of fiscal year 2011, USPS’s $5.5 billion retiree health benefit payment was

delayed until August 1, 2012. Pub. L. No. 112-74, § 632. USPS, however, did not make this payment. d

USPS did not make its $5.6 billion required payment in fiscal year 2012.

While the PSRHBF balance covered about 49 percent of USPS’s retiree 

health benefit liability at fiscal year-end 2012, USPS’s deteriorating 

financial outlook will make it difficult under current requirements for USPS 

to continue prefunding the remaining unfunded liability in the short term, 

and possibly to continue funding the remaining unfunded liability over the 

next several decades, as required under PAEA.
 

Page 15 GAO-13-112 U.S. Postal Service

We considered current law (PAEA) requirements against five alternative 

approaches for funding the costs of retiree health benefits, each of which 

involves tradeoffs that could impact USPS’s short-term cash flow, its 

future financial condition, different generations of postal ratepayers, and 

over a million postal employees and retirees. We compared the current 

law prefunding requirements as well as approaches that have been 

proposed in (1) a bill passed by the House of Representative’s Committee 

on Oversight and Government Reform, (“House Bill”),27 (2) in the 

President’s fiscal year 2012 budget request (“Administration Approach”), 

and (3) in a bill passed by the Senate, (“Senate Bill”)28

Our projections

. In addition, some 

postal stakeholders have argued that prefunding is unnecessary or 

inadvisable altogether, so we also examined the effects of implementing 

two variations on a “Pay-as-You-Go Approach.” 

29

Current law (the 2006 PAEA) consists of distinct prefunding requirements 

that apply first through fiscal year 2016 and then from fiscal year 2017 

forward. Through fiscal year 2016, USPS is required to make fixed annual 

payments

showed that some approaches would reduce USPS’s 

annual payments in the short term, thereby easing its cash flow problems 

and financial losses in the near future, but would increase its unfunded 

liability, sometimes substantially, and require larger annual payments 

later. Other approaches would have USPS reduce its unfunded liabilities 

more aggressively, which could result in significantly higher financial 

losses in the near future and thereby increase USPS’s financial 

challenges. These options must be considered within the context of 

USPS’s financial situation and prospects. USPS officials told us that given 

its current financial problems, USPS simply does not have the cash to 

implement any of the prefunding options and that larger structural 

solutions must be found to USPS’s financial viability as a self-sustaining 

entity.

30

 

27H. R. 2309, 112th Cong. (2011).

ranging from $5.5 billion to $5.8 billion to the PSRHBF in 

28S. 1789, 112th Cong. (2011).

29We obtained data and projections from USPS and OPM, and built on this information by 

performing additional calculations and projections. Methodology and assumptions are 

presented in more detail in appendix I.

30We refer to these payments as “fixed” because they are set amounts that do not vary 

with an actuarial assessment of future retiree health care costs.

USPS’s Future 

Payments and 

Unfunded Liabilities 

Vary Widely Based on 

Approaches to Fund 

Retiree Health 

Benefits 

PSRHBF Funding
 

Page 16 GAO-13-112 U.S. Postal Service

addition to making its share of premium payments for existing retirees 

and beneficiaries, which OPM has estimated will rise from about $2.5 

billion to about $3.8 billion per year between fiscal year 2011 and fiscal 

year 2016.31

1. the actuarially determined cost of future benefits attributable to 

employee service during the fiscal year (known as the annual 

“normal cost”), and 

Beginning in fiscal year 2017, the current law switches to an 

“actuarial approach” for the remaining funding, under which USPS’s share 

of premium payments for existing retirees and beneficiaries is paid from 

the PSRHBF rather than by USPS, and USPS makes annual payments to 

the PSRHBF consisting of two components: 

2. the actuarially determined amount that, as calculated by OPM,

would be projected to fully fund the remaining unfunded liability 

over an amortization period ending in the later of fiscal year 2056 

or 15 years subsequent to the then-current fiscal year.

Current law requires OPM to base its actuarial calculations of prefunding 

requirements on the actuarial assumptions used by OPM for its financial 

reporting. We will discuss the relevance of this current law assumption 

basis later in this report.

As discussed earlier, USPS did not make the required 2011 and 2012 

payments to the PSRHBF, totaling $11.1 billion. We modeled a modified 

version of current law assuming that these missed payments are 

eliminated by legislation and that the current law payment schedule 

resumes with the payment of $5.6 billion due at the end of fiscal year 

2013. We refer to this schedule as “Modified Current Law Approach” in 

our presentation of results.

The three alternative prefunding approaches we examined differ from 

current law in the following respects.

• The House Bill (H.R. 2309) reduces the fixed payment due at the end 

of fiscal year 2011 from $5.5 billion to $1.0 billion, making up the 

difference in higher fixed payments in fiscal year 2015 and fiscal year 

 

31The increase in premium payments is driven in part by a significant number of expected 

retirements. As a result, this increase in payments for retirees would be at least partially 

offset by otherwise lower payments for employees, since there would be fewer of them. 
 

Page 17 GAO-13-112 U.S. Postal Service

2016. Starting in fiscal year 2017, the House Bill’s actuarial approach 

for determining prefunding is the same as current law. As with our 

modeling of current law, because the 2011 and 2012 payments have 

already been missed, we modeled a modified version of the House 

Bill in which the House Bill’s 2011 and 2012 payments are eliminated 

by legislation and the House Bill’s payment schedule commences in 

fiscal year 2013. We refer to this schedule as “Modified House 

Approach” in our presentation of results. 

• The Administration Approach restructures and generally reduces32 the 

required fixed prefunding payments in each fiscal year from 2011 

through 2016. It also calls for USPS’s share of premium payments for 

existing retirees and beneficiaries to begin to be paid from the 

PSRHBF right away, rather than beginning in fiscal year 2017. As a 

result, total USPS payments prior to fiscal year 2017 (prefunding plus 

any required payment of premiums) are significantly lower under the 

Administration Approach than under current law or the House Bill 

(and, consequently, would be somewhat greater after fiscal year 2017 

to make up for this). Starting in fiscal year 2017, the Administration’s 

actuarial approach for determining prefunding is the same as current 

law and the House bill. As with current law and the House Bill, we 

modeled a “Modified Administration Approach” that eliminates its 2011 

and 2012 payments by legislation and commences payment in 2013.

• The Senate Bill (S. 1789) differs from current law, the House Bill, and 

the Administration Approach in three key aspects. First, the Senate 

Bill eliminates the fixed prefunding payments and begins an actuarial 

approach to prefunding right away (which we modeled to begin at the 

start of fiscal year 2013).33

 

32Reductions would occur in each year except 2016, when the prefunding payment would 

be slightly higher than under current law.

Second, the Senate Bill uses a target of

funding 80 percent of the liability, instead of the 100 percent funding 

targeted by current law and the other approaches. Third, the Senate 

Bill directs OPM to use actuarial assumptions consistent with those 

used by OPM to determine funding for USPS’s share of liabilities in 

the federal civilian pension programs. These pension-funding 

33As calculated by OPM, the amortization period would run to the later of 2052 or 15 years 

from the then-current fiscal year, in contrast to the later of 2056 or 15 years from the thencurrent fiscal year under current law. USPS’s share of premium payments would be paid 

from the PSRHBF, instead of payments made by USPS, beginning right away (which we 

modeled to begin in fiscal year 2013), instead of in fiscal year 2017 under current law.
 

Page 18 GAO-13-112 U.S. Postal Service

assumptions are selected by OPM, with advice from an independent 

Board of Actuaries. As discussed further in the next section and later 

in this report, this assumption basis specified in the Senate Bill differs 

from the assumption basis specified in current law and retained in the 

House Bill and Administration proposal. We refer to the Senate Bill 

provisions as “Modified Senate Approach” in our presentation of 

results.34

Key features of current law and these alternative approaches are 

summarized in table 2. In addition, we also modeled two variations on a 

Pay-as-You-Go Approach, discussed in a subsequent section of this 

report.

Table 2: Key Features of Current Law and Alternative Approaches for Prefunding USPS Retiree Health Benefits

Approach (as 

modified to begin 

in fiscal year 2013)

Funding 

target 

(percentage 

of liability)

Initial target year 

for amortization 

schedule

for funding

unfunded liabilitya

Period when 

premiums for current 

retirees begin being 

paid from PSRHBF 

instead of by USPS Assumption basis

Total fixed

prefunding payments,

2013–2016 fiscal 

years

Modified Current 

Law Approach

100 2056 2017 Consistent with OPM 

financial reporting

$22.8 billion

Modified House 

Approach

100 2056 2017 Consistent with OPM 

financial reporting

$27.3 billion

Modified 

Administration 

Approach

100 2056 2013 Consistent with OPM 

financial reporting

$18.1 billion

Modified Senate 

Approach

80 2052 Upon enactment of 

Senate Billb Consistent with USPS’s CSRS and 

FERS funding

NA—Prefunding 

payments are 

actuarially 

determined, not fixed

Source: GAO. 

a

As calculated by OPM, the amortization schedule extends to the later of this target year or 15 years 

from the then-current fiscal year. b

We modeled this approach based on enactment of the bill in the beginning of fiscal year 2013.

Our analysis shows that, over the short-term period ending in fiscal year 

2020, the Modified Current Law and House Approaches would decrease 

USPS’s unfunded liability for retiree health benefits, while the Modified 

Administration and Senate Approaches would increase the unfunded 

 

34As discussed later in this report, we modified assumptions to analyze the four 

prefunding approaches on a comparative basis, and also to demonstrate that the 

modification does not have a material effect on our findings. 

Short- and Long-term 

Effects of Alternative 

Approaches 
 

Page 19 GAO-13-112 U.S. Postal Service

liability. This is mainly the result of significantly higher contributions under 

the Modified Current Law and House Approaches in fiscal years 2013 

through 2016. Over the longer term through 2040, there are significant 

differences in the projected unfunded liability among the various 

approaches. The Modified Current Law, House, and Administration 

Approaches are projected to eliminate most of the unfunded liability over 

that period; the Modified Senate Approach is projected to leave a larger 

portion of the liability still unfunded because of its lower funding target, 

while the two Pay-as-You-Go Approaches we examined would lead to 

very large unfunded liabilities.

It should be understood that projections of this type, especially longer 

term projections, contain a significant degree of uncertainty. Nonetheless, 

given the magnitude of the retiree health benefit liabilities and the 

importance of being able to pay for these benefits, reasonable projections 

of the associated costs and liabilities provide essential information for 

enabling responsible stewardship of USPS resources.

Our comparison of the four prefunding approaches was complicated by 

the fact that the Senate Bill calls for selecting assumptions based on 

different criteria than current law, the House Bill, and the Administration 

Approach. Assumptions represent estimates of future economic and 

demographic trends, and while initial assumptions may differ, only one 

scenario can actually occur, and assumptions generally change over time 

to reflect emerging experience. Accordingly, to compare the four 

prefunding approaches, we modeled them under uniform assumptions—

first using the current law assumption basis, presented in this section, and 

then using the Senate bill assumption basis, presented in appendix II. We 

also discuss the underlying differences between these two assumption 

bases, and present some comparative results, in the section below on 

“Sensitivity to Assumptions.” Our overall findings were not materially 

affected by the choice between these two assumption bases.

For a short-term outlook, we projected USPS’s required payments 

(prefunding contributions as well as premium payments for current 

retirees, when applicable) and the amount of unfunded liability in fiscal 

Short-term Effects
 

Page 20 GAO-13-112 U.S. Postal Service

years 2013 through 2020.35

Table 3: Estimated Annual Payments and Unfunded Liabilities in the Short Term (Fiscal Years 2013 to 2020) under Current

Law Assumption Basis

Over this 8-year period, USPS’s payments 

under the Modified Current Law and House Approaches would be 

significantly greater than under the Modified Administration and Senate 

Approaches. For example, estimated total payments over this period 

under the Modified Current Law Approach would be 48 percent greater 

than under the Modified Senate Approach. In particular, payments over 

the 8 years would total about $58 billion under Modified Current Law and 

$61 billion under the Modified House Approach, versus $44 billion under 

the Modified Administration Approach and $39 billion under the Modified 

Senate Approach. Higher payments mean a lower unfunded liability at the 

end of the period, and vice versa. Thus, at the end of fiscal year 2020, the 

Modified Current Law and House Approaches are projected to result in 

unfunded liabilities of $39 billion and $35 billion, respectively, whereas the 

Modified Administration and Senate Approaches are projected to result in 

unfunded liabilities of $59 billion and $64 billion respectively. Thus, in the 

short term through fiscal year 2020, the unfunded liability is projected to 

decrease under the Modified Current Law and House Approaches and 

increase under the Modified Administration and Senate Approaches (see 

table 3).

Dollars in billions

Modified Current

Law Approach

Modified House 

Approach

Modified Administration 

Approach

Modified

Senate Approach

Annual 

Payments 

Unfunded 

Liability (at 

Year-end)

Annual 

Payments 

Unfunded 

Liability (at 

Year-end)

Annual 

Payments 

Unfunded 

Liability (at 

Year-end)

Annual 

Payments 

Unfunded 

Liability (at 

Year-end)

2013 $8.6 $47.6 $8.6 $47.6 $1.3 $55.0 $4.4 $51.8 

2014 $8.9 $44.6 $8.9 $44.6 $5.4 $55.9 $4.5 $53.6 

2015 $9.2 $41.2 $11.5 $39.0 $5.6 $56.8 $4.5 $55.4 

2016 $9.6 $37.3 $11.9 $32.7 $5.8 $57.5 $4.7 $57.1 

2017 $5.0 $37.9 $4.8 $33.3 $6.2 $58.0 $4.9 $58.9 

 

35All approaches discussed in the following sections, except the section on sensitivity to 

assumptions, are modeled under the current law assumption basis. Comparative results 

under the Senate bill assumption basis are discussed in the section on sensitivity to 

assumptions and presented more fully in appendix II.
 

Page 21 GAO-13-112 U.S. Postal Service

Dollars in billions

Modified Current

Law Approach

Modified House 

Approach

Modified Administration 

Approach

Modified

Senate Approach

Annual 

Payments 

Unfunded 

Liability (at 

Year-end)

Annual 

Payments 

Unfunded 

Liability (at 

Year-end)

Annual 

Payments 

Unfunded 

Liability (at 

Year-end)

Annual 

Payments 

Unfunded 

Liability (at 

Year-end)

2018 $5.2 $38.4 $5.0 $33.9 $6.4 $58.3 $5.1 $60.5 

2019 $5.4 $38.8 $5.2 $34.4 $6.6 $58.6 $5.3 $62.2 

2020 $5.7 $39.2 $5.4 $34.7 $6.8 $58.7 $5.5 $63.8 

Total 

Payments 

$57.7 NA $61.1 NA $44.1 NA $39.0 NA

Average 

Annual 

Payment

$7.2 NA $7.6 NA $5.5 NA $4.9 NA

Source: GAO. 

Note: Totals may not add because of rounding. Annual payments consist of any prefunding payments 

to the PSRHBF, and, where applicable, USPS’s share of premium payments for existing retirees and 

beneficiaries (see descriptions of the different approaches). Unfunded liabilities are the amounts as of 

the end of the fiscal year, and start at an estimated value of $50.1 billion as of September 30, 2012, 

under all four approaches. Subsequent to the development of these projections, USPS reported the 

actual unfunded liability as of September 30, 2012, to be $47.9 billion.

The higher payments required under the Modified Current Law and 

Modified House Approaches are concentrated in fiscal years 2013 

through 2016, prior to the switch to an actuarial basis in fiscal year 2017.

These payments in fiscal years 2013 through 2016 are significantly higher 

than those that would be calculated under the specified actuarial 

approach.36

 

36There is no single actuarial approach, but an actuarially determined contribution will 

typically consist of a normal cost—which reflects future costs attributable to the current 

year of employee service—plus an amortization payment to pay down the unfunded 

liability. The size of the amortization payment will vary with the length of the amortization 

period selected. A longer amortization period requires lower annual payments but over a 

longer period. A shorter amortization period requires larger amortization payments but 

over a shorter period. 

For example, the payments that USPS would have to make 

in fiscal year 2016 under the Modified House Approach, $11.9 billion, is 

more than double the following year’s payment of $4.8 billion, when the 

actuarial approach begins. Similarly, under Modified Current Law, the 

estimated 2016 payments would be almost double the 2017 payments. In 

contrast, payments under the Modified Administration and Senate 

Approaches are more affordable and consistent over the period. Figure 4 

illustrates these patterns over the fiscal years 2013 through 2020.
 

Page 22 GAO-13-112 U.S. Postal Service

Figure 4: Estimated Annual Payments for Different Approaches from Fiscal Year 2013 to Fiscal Year 2020 under Current Law 

Assumption Basis 

In summary, these projections illustrate: (1) the inverse trade-off between 

payment requirements and unfunded liability (higher payments mean 

lower unfunded liability; lower payments mean higher unfunded liability) 

and (2) possible patterns for required payments (e.g., front-loaded, 

consistent, or back-loaded). These options must be considered within the 

context of USPS’s financial situation and prospects.

We extended our projection of USPS’s required payments and the 

amount of unfunded liability to fiscal year 2040. While the uncertainty of a 

projection increases with the length of the projection period, a longer 

projection period allows potential longer-term implications of different 

approaches to emerge—effects that might not be observable under a 

short-term projection. Since dollar amounts in fiscal year 2040 are not 

fully comparable to dollar amounts today, it is helpful to “normalize” such 

Long-term Effects
 

Page 23 GAO-13-112 U.S. Postal Service

long-term projections to make the results more comparable across time 

periods. In table 4 we show projected payments and unfunded liability in 

fiscal year 2040 in three different ways: (1) as nominal (unadjusted) dollar 

amounts; (2) in constant (inflation-adjusted) 2012 dollars; and (3) as a 

percentage of USPS’s projected 2040 modified employee compensation 

costs37

Table 4: Estimated Annual Payment and Unfunded Liability in the Long Term (in Fiscal Year 2040, the Last Year of the 

Projection) under Current Law Assumption Basis

(which for convenience we refer to as “compensation”). We also 

show the projected funded percentage—or the ratio of PSRHBF assets to 

USPS’s liability for retiree health benefits.

Dollars in billions

Fiscal Year

2040

Modified Current Law 

Approach

Modified

House Approach

Modified Administration 

Approach

Modified Senate 

Approach

Annual 

Payment

Unfunded 

Liability 

Annual 

Payment

Unfunded 

Liability

Annual 

Payment

Unfunded 

Liability

Annual 

Payment

Unfunded 

Liability

Nominal $ $11.8 $9.4 $11.5 $6.5 $12.9 $22.1 $12.5 $66.5

Constant $ $6.1 $4.8 $5.9 $3.4 $6.7 $11.4 $6.4 $34.2

Percentage of 

Compensation 15 12 14 8 16 28 16 83

Funded 

percentage NA 96 NA 97 NA 91 NA 73

Source: GAO. 

Note: Annual payment is prefunding payment to the PSRHBF. Unfunded liability is as of the end of 

the fiscal year. Constant dollar amounts were derived by converting the projected 2040 nominal dollar 

amounts into 2012 dollars, using an inflation assumption based on the current law assumption basis. 

Compensation was projected by GAO based on information provided by USPS. Additional information 

on methodology and assumptions is presented in appendix I.

Showing payments and unfunded liability amounts as a percentage of 

compensation provides a sense of the size of USPS’s retiree health care 

costs relative to the size of USPS’s operations. Projecting compensation 

does require an additional assumption regarding compensation growth 

and therefore introduces additional uncertainty into the projection.38

 

37Compensation costs consist of projected employee salary and wage costs plus 

employee benefit costs exclusive of retiree health benefits, worker’s compensation, or any 

forecasted contract negotiations savings.

38We assumed compensation growth would vary across the two assumption bases 

because of the different underlying inflation assumptions. Further details of the projection 

are contained in appendix I. 
 

Page 24 GAO-13-112 U.S. Postal Service

Nonetheless, increases over time in projected payments and unfunded 

liabilities as a percentage of compensation can be indicative of a likely 

greater strain on USPS’s resources. For example, unfunded liability as a 

percentage of compensation will rise to the extent that USPS is operating 

with a reduced workforce.

As seen in table 4, in comparing the projections under Modified Current 

Law and the three alternative modified approaches, the differences in the 

projected payment required in fiscal year 2040 are not large, with the 

dollar amount of the projected payment ranging from $11.5 billion to 

$12.9 billion across the four approaches ($5.9 billion to $6.7 billion in 

constant dollars). The more significant differences in the annual 

payments, across the four approaches, occur in the short-term period 

covering fiscal years 2013 through 2016. There are, however, significant 

differences in the projected unfunded liability in fiscal year 2040. The 

Modified Senate Approach results in a projected unfunded liability of 

about $67 billion; this compares to unfunded liabilities of $22 billion under 

the Modified Administration Approach, $9 billion under Modified Current 

Law, and $7 billion under the Modified House Approach. This projected 

unfunded liability under the Modified Senate Approach amounts to $34 

billion in constant dollars and 83 percent of projected annual 

compensation. For the Modified Administration Approach, the projected 

unfunded liability is $11 billion in constant dollars and 28 percent of 

projected compensation. The corresponding results under the Modified 

Current Law and House Approaches are significantly smaller. For 

example, as a percentage of projected compensation, the projected 

unfunded liability is 12 percent and 8 percent under the Modified Current 

Law and House Approaches, respectively.

A primary reason for these differences is that the Senate Approach uses 

a target funded percentage of 80 percent, whereas the other three 

approaches use a target of 100 percent. By fiscal year 2040, the funded 

percentage is projected to have reached 73 percent under the Modified 

Senate Approach, versus 91 percent under the Modified Administration 

Approach, 96 percent under Modified Current Law, and 97 percent under 

the Modified House Approach.

It is important to note that reaching a 100 percent funded percentage— 

that is, the unfunded liability is fully paid off and PSRHBF assets equal 

the liability—would not mean that USPS would have no further prefunding 

payments to make. USPS would continue to have to pay the “normal 

cost” each year into the fund, reduced by amortization of any surplus that 

might develop if experience is more favorable than assumed, or 
 

Page 25 GAO-13-112 U.S. Postal Service

increased if less favorable such that the funded percentage falls back 

under 100 percent. As mentioned earlier, the normal cost is the actuarially 

determined cost of future benefits attributable to employee service during 

the fiscal year, a cost that increases the liability each year. Failure to 

continue to make such contributions into the fund each year would mean 

a failure to pay for the cost of then-current employee service; the likely 

result would be PSRHBF assets again falling short of the liability, thereby 

creating a new unfunded liability. Under any of the approaches modeled, 

by fiscal year 2040, roughly 80 to 90 percent of USPS’s required payment 

would consist of this normal cost.

Combining the short-term and long-term projection results, figure 5 

illustrates projected annual payments, as a percentage of projected 

compensation, for each fiscal year from 2013 through 2040. The largest 

differences among the four approaches occur from fiscal year 2013 

through fiscal year 2016. Under the Modified House Approach, estimated 

required payments are in excess of 20 percent of compensation in all 4 of 

these years, climbing to 28 and 29 percent of compensation in fiscal year 

2015 and fiscal year 2016. Under Modified Current Law, estimated 

required payments are also in excess of 20 percent of compensation in 

each of these years, peaking at 23 percent of compensation in fiscal year 

2016. In contrast, under the Modified Administration Approach, estimated 

required payments start at just 3 percent of compensation in fiscal year 

2013 before climbing to 13 to 14 percent of compensation in the ensuing 

three years. Under the Modified Senate Approach, estimated required 

payments round to a steady 11 percent of compensation in each of these 

first 4 years.

From fiscal year 2017 through fiscal year 2040, the estimated required 

contributions are closer together across the four approaches, ranging 

from 11 to 17 percent of compensation. The projected payments are 

somewhat higher under the Modified Administration Approach than under 

the Modified Current Law or House Approaches, in order to make up for 

the differences in payments from fiscal year 2013 through fiscal year 

2016. The projected payments under the Modified Senate Approach 

Short- and Long-term 

Effects Combined
 

Page 26 GAO-13-112 U.S. Postal Service

follow a slightly different trajectory because of the approach’s 80 percent 

funding target, but fall within the same range.39

Figure 5: Estimated Annual Payments (as a Percentage of Compensation) for Different Approaches from Fiscal Year 2013 to 

Fiscal Year 2040 under Current Law Assumption Basis

 

39Although the Modified Senate Approach bases amortization payments on the difference 

between PSRHBF assets and 80 percent of the liability, the normal cost portion of 

required payments is based on 100 percent of the normal cost. Normal cost constitutes a 

higher portion of total payments towards the end of the projection period.
 

Page 27 GAO-13-112 U.S. Postal Service

Figure 6 illustrates the projected unfunded liability, as a percentage of 

projected USPS annual compensation costs, as of the end of each fiscal 

year from 2012 through 2040. For each approach modeled, the projection 

starts at the estimated unfunded liability of 108 percent of compensation 

as of the end of fiscal year 2012.40

By the end of the projection period in fiscal year 2040, the vast majority of 

the unfunded liability, measured as a percentage of compensation, is 

projected to be eliminated under the Modified House and Modified 

Current Law Approaches, while a smaller majority of it is projected to be 

eliminated under the Modified Administration Approach. A larger 

unfunded liability as a percentage of compensation is projected to be 

retained under the Modified Senate Approach because of its 80 percent 

funding target.

In the short term, the unfunded liability 

as a percentage of compensation trends down under the Modified House 

Approach and Modified Current Law Approach because of their relatively 

high required early payments, while the unfunded liability as a percentage 

of compensation trends upward under the Modified Administration 

Approach and, for a somewhat longer period, under the Modified Senate 

Approach. In the longer term, the unfunded liability as a percentage of 

compensation trends down under all four approaches.

 

40These projections were performed prior to the release of actual 2012 results.
 

Page 28 GAO-13-112 U.S. Postal Service

Figure 6: Estimated Unfunded Liability (as a Percentage of USPS’s Annual Compensation Costs) for Different Approaches 

from Fiscal Year-end 2012 to Fiscal Year-end 2040 under Current Law Assumption Basis

Note: Under all four modified approaches to prefunding, the unfunded liability starts at the same point 

at September 30, 2012, and begins to diverge in fiscal year 2013 with the different approaches to 

prefunding.

Figure 7 illustrates the funding gap by another measure, the funded 

ratio—that is, the percentage of the liability that is covered by PSRHBF 

assets. This figure illustrates how a divergence emerges from fiscal year 

2013 to fiscal year 2016 between the Modified House and Current Law 

Approaches on the one hand, and the Modified Administration and 

Senate Approaches on the other hand. By the end of the projection 

period, the funded ratio is projected to be just short of the 100 percent 

target under the Modified House and Modified Current Law Approaches, 
 

Page 29 GAO-13-112 U.S. Postal Service

slightly further away from 100 percent under the modified Administration 

Approach, and, under the Modified Senate Approach, approaching its 

lower 80 percent funded ratio target.

Figure 7: Estimated Funded Ratios for Different Approaches from Fiscal Year-end 2012 to Fiscal Year-end 2040 under Current 

Law Assumption Basis

Note: Under all four modified approaches to prefunding, the funded ratio starts at the same point at 

September 30, 2012, and begins to diverge in fiscal year 2013 with the different approaches to 

prefunding.

The annual prefunding payments that have been made since prefunding 

commenced in 2007—and that would continue to be made under any of 

the four prefunding approaches examined here—can be broken down into 

two components: a portion to pay for the cost of future benefits 
 

Page 30 GAO-13-112 U.S. Postal Service

attributable to the current year of employees’ service (the “normal cost”), 

and the remainder, which pays down part of the unfunded liability. One of 

the rationales for prefunding is to pay for benefits as they are earned—

during the working years—rather than later after the workers have retired 

and are no longer generating revenue for the enterprise. Further, this 

serves the purpose of assigning full costs of current employee 

compensation to current ratepayers, rather than to future ratepayers. A 

complicating factor is what might be called the “legacy” unfunded liability, 

i.e., the existing unfunded liability that conceptually should have been 

paid by ratepayers in prior years but was not. There is no obvious answer 

as to who should be responsible for the legacy unfunded liability, which 

ultimately comes down to a policy decision. The approach in PAEA 

spreads the cost of USPS’s legacy unfunded liability over 50-plus years of 

then-future postal ratepayers.

To illustrate the portion of prefunding requirements that are attributable to 

legacy costs, we found that across the four different prefunding 

approaches that we examined, legacy costs would account for anywhere 

from 39 percent to 53 percent of the prefunding requirement in fiscal year 

2017, tapering down to anywhere from 8 percent to 18 percent by fiscal 

year 2040.41

Measurements of actuarial costs and liabilities, as well as projections of 

such measures into the future, are subject to inherent uncertainty, and 

depend on a combination of economic and demographic assumptions as 

to future experience. Current law requires OPM to determine the value of 

USPS’s retiree health benefit liability based on actuarial assumptions that 

are consistent with those used by OPM for its financial reporting of 

liabilities for federal employee benefits. These assumptions are to be 

used to determine USPS’s funding requirements beginning in fiscal year 

2017, when current law switches from a fixed-payment prefunding 

requirement to actuarially determined prefunding requirements. When the 

current law was enacted, this approach to selecting actuarial assumptions 

was consistent with the approach used by OPM for determining funding 

requirements for USPS’s participation in the CSRS and FERS pension 

programs.

 

41These percentages are from the projections under the current law assumption basis.

Sensitivity to Assumptions
 

Page 31 GAO-13-112 U.S. Postal Service

In 2008, the Federal Accounting Standards Advisory Board (FASAB), 

which promulgates financial reporting standards for the federal 

government, issued Statement of Federal Financial Accounting Standards 

No. 33 (SFFAS 33), which, beginning in 2010, specified particular, new 

methodologies for the selection of economic assumptions for valuing 

various post-employment benefits for financial reporting purposes.42

The particular assumptions that differ are with respect to the interest rate 

(also known as the discount rate), the general inflation assumption, and 

the medical inflation (also known as the “trend”) assumption. Table 5 

shows the differences in these assumptions for the September 30, 2011, 

actuarial valuations performed by OPM, which served as the basis for our 

projections.

As a 

result, the assumptions used by OPM for financial reporting for federal 

employee benefits—and by extension under the current law, for 

determining USPS’s future prefunding requirements for retiree health care 

benefits—became different from the assumptions used by OPM to 

determine USPS’s funding requirements for CSRS and FERS. The House 

and Administration Approaches retain the current law assumption basis 

for determining USPS’s prefunding requirements; the Senate Approach 

would switch the determination of USPS’s prefunding requirements to 

assumptions consistent with those now used for USPS’s funding 

requirements for CSRS and FERS.

43

 

42The changes were designed to reduce the year-to-year volatility in the value of the 

liabilities reported by some agencies, done via the use of an historical averaging period, 

as discussed in the text.

43In addition to the three economic assumptions discussed in this section, the valuation 

and projection of retiree health benefit payments and liabilities depend on other 

assumptions as well, such as assumed mortality rates. These other assumptions would 

not vary between the current law assumption basis and the Senate Bill assumption basis.

We have not audited the actuarial assumptions—meaning the set of economic and 

demographic assumptions—used by OPM. 
 

Page 32 GAO-13-112 U.S. Postal Service

Table 5: Key Differences between the Two sets of PSRHBF Funding Assumptions, as of September 30, 2011

Current law assumption

basis (also used in House

and Administration Approaches) Senate bill assumption basis

Basis Consistent with OPM’s financial 

reporting of actuarial value of federal 

employee benefits

Consistent with USPS’s funding 

requirements for CSRS and FERS

Interest rate (also known as discount 

rate)

4.90 5.75

General inflation 2.40 3.00

Medical inflation (also known as the 

“trend” assumption)a Initial rate

Peak rate

Ultimate rate

5.50

6.39

4.35

5.50

7.01

4.96

Source: GAO. 

a

The trend assumption rises to a peak rate for 2015 and very gradually falls to an ultimate rate for 

2084 and later.

Under SFFAS 33, the discount rate assumption should reflect average 

historical interest rates, over the prior 5 years or longer, on marketable 

Treasury securities with maturities consistent with the cash flows being 

discounted. The number of historical rates used in the calculation of this 

historical average should be consistent from year to year. OPM uses a 

10-year historical averaging period.44 Further, the discount rate, the 

inflation assumption, and other economic assumptions should be 

consistent with one another.45

In contrast to the current law assumption basis that is now tied to a 

historical averaging period, the assumptions for determining USPS’s 

funding requirements for CSRS and FERS represent OPM’s estimate of 

future, long-term experience, informed by advice from an independent 

OPM determines the general inflation 

assumption under SFFAS 33 using the same 10-year historical averaging 

period that it uses in determining the discount rate. The selection of 

assumptions is also guided by relevant Actuarial Standards of Practice, 

which are promulgated by the Actuarial Standards Board.

 

44At least two other federal agencies that value large benefit programs with liabilities for 

future pension, medical, or disability benefits—the Department of Defense and the 

Veterans’ Administration—also use a 10-year historical averaging period, for consistency 

across federal agencies in federal financial reporting.

45For example, the level of interest rates will generally be higher or lower depending upon 

expectations regarding future inflation.
 

Page 33 GAO-13-112 U.S. Postal Service

Board of Actuaries, and similarly guided by relevant Actuarial Standards 

of Practice. These standards too require that economic assumptions be 

consistent with one another.

The relationship between the two assumption bases illustrated in table 5 

is not static, so that the gap between the two assumption bases, and 

even which assumption base has higher rates, could change over time. It 

is important to note that assumptions that are tied to historical averages—

as is the case under the current law assumption basis since the 

promulgation of SFFAS 33—can potentially diverge significantly from 

either current economic circumstances or from the current long-term 

economic outlook. The assumption criteria in SFFAS 33 were designed to 

accomplish financial reporting objectives rather than funding objectives.

In selecting the medical inflation assumption, OPM relies on a model 

developed by the Society of Actuaries.46

As mentioned earlier, we modeled all four modified prefunding 

approaches in two ways: first, as if they all used the current law 

assumption basis, and second, as if they all used the Senate bill 

assumption basis. Our findings and conclusions are not materially 

different under the two different assumption bases. Figure 8 compares 

the dollar amount of estimated USPS payments, in each fiscal year from 

2013 through 2020, under the Modified Senate Approach to prefunding,

using both the current law assumption basis and the Senate bill 

assumption basis. These dollar payment amounts differ by just 2 percent 

in aggregate over the period, and by not more than 4 percent in any 

particular year.

This model ties medical inflation 

to the general inflation assumption (among other factors), so that a higher 

expected general inflation rate implies higher expected medical inflation.

 

46This model is known as the Getzen model.
 

Page 34 GAO-13-112 U.S. Postal Service

Figure 8: Estimated Annual Payments for Modified Senate Prefunding Approach 

from Fiscal Year 2013 to Fiscal Year 2020 under Current Law Assumption Basis and 

Senate Bill Assumption Basis 

Figure 9 compares estimated USPS payments under the Modified Senate 

Prefunding Approach, over the entire projection period from fiscal years 

2013 through 2040, as a percentage of projected USPS annual 

compensation costs, again under both the current law assumption basis 

and the Senate bill assumption basis. The difference in the average 

payment percentage is just 0.7 percentage point, with the difference 

never exceeding 1 percentage point in any year.
 

Page 35 GAO-13-112 U.S. Postal Service

Figure 9: Estimated Annual Payments (as a Percentage of Compensation) for Modified Senate Prefunding Approach from 

Fiscal Year 2013 through Fiscal Year 2040 under Current Law Assumption Basis and Senate Bill Assumption Basis

Because of the closeness of the results using the two assumption bases, 

we have chosen to present numerical results across all four prefunding 

approaches using the current law assumption basis in the main body of 

this report. Appendix II contains comparable numerical results using the 

Senate bill assumption basis. The primary reason for similar results under 

the two assumption bases is that the effects of differences in particular 

assumptions are offsetting to a certain extent. For example, the discount 

rate of 5.75 percent under the Senate bill assumption basis is more 

optimistic than the discount rate of 4.90 percent under the current law 

assumption basis. However, a higher discount rate suggests higher 

inflation and medical inflation; the higher medical inflation offsets much of 

the benefit of the higher discount rate.
 

Page 36 GAO-13-112 U.S. Postal Service

The two different inflation assumptions were also incorporated into our 

projection of USPS’s annual compensation costs, which we extended 

based on a 10-year forecast of workforce and compensation provided to 

us by USPS. More information on these data and projections is provided 

in appendix I. We did not otherwise analyze variations in the workforce 

and compensation assumptions, as a more extensive analysis of 

assumption variations was beyond the scope of our study.

As USPS notes correctly in its fiscal year 2011 Form 10-K report, 

“Because calculation of this [retiree health benefits] liability involves 

several areas of judgment, estimates of the liability could vary significantly 

depending on the assumptions used.”47

 

47A 10-K Form is an annual report that many for-profit corporations must file with the SEC 

within 90 days of the close of their fiscal year. It is a publicly available document that 

contains audited financial statements and other information on a corporation’s financial 

condition.

In comparing the effects of the 

current law assumption basis versus the Senate bill assumption basis, we 

noted that differences in the discount rate and medical inflation 

assumptions have offsetting effects, so that the aggregate difference 

between the two assumption bases is not large. If, however, one of the 

assumptions were to change without an offsetting change in another 

assumption, the impact would be larger. OPM provided information on the 

sensitivity of the liability to variation in the medical trend alone, holding 

other assumptions constant. OPM’s most recent measure of USPS’s 

liability for retiree health benefits would have been 16 percent higher if the 

medical trend assumption had been one percentage point higher in all 

years (i.e., in table 5 above, 6.5 percent instead of 5.5 percent in the first 

year, etc.), and would have been 13 percent lower if the medical trend 

assumption had been one percentage point lower. Moreover, because the 

unfunded liability is equal to the difference between the liability itself and 

the amount of assets, a given percentage change in the liability can 

produce a larger percentage change in the unfunded liability. If the 2011 

liability had been 16 percent higher, the unfunded liability would have 

been 31 percent higher; if the liability had been 13 percent lower, the 

unfunded liability would have been 26 percent lower. Thus, the $46 billion 

unfunded liability as of September 30, 2011, varies from $34 billion to $60 

billion over this range of alternative assumptions. See table 6 below.
 

Page 37 GAO-13-112 U.S. Postal Service

Table 6: Sensitivity of Fiscal Year-end 2011 Unfunded Liability to One-Percentage-Point Change in Medical Inflation 

Assumption 

Actual amount

If medical inflation

one percentage point higher

If medical inflation

one percentage point lower

New amount Percent change New amount Percent change

Liability $90.3 $104.4 + 16 $78.5 - 13

Assets $44.1 $44.1 — $44.1 — 

Unfunded Liability = 

Liability - Assets $46.2 $60.3 + 31 $34.4 - 26

Source: GAO. 

Arguments have been made that requiring USPS to prefund its retiree 

health care benefits is unnecessary, unfair, or inadvisable, so we also 

examined the effects of a Pay-as-You-Go Approach. Under pay-as-yougo funding, each year USPS would only pay its share of premium 

payments for then-existing retirees and beneficiaries—there would be no 

prefunding.

Given that money has already been prefunded in the PSRHBF, we first 

modeled a pay-as-you-go funding approach in which the fund would be 

drawn upon to pay USPS’s share of premium payments for as long as 

possible. Under this approach, no additional contributions would be made 

to the fund, the fund would grow with interest, and USPS’s share of 

premium payments for retirees and beneficiaries would be paid out of the 

fund until the fund was exhausted. Once the fund was exhausted, USPS 

would pay these premiums directly as they became due.

Our projections show that, under either of the two sets of assumptions48

 

48Results presented in this section are on the current law assumption basis. Comparative 

results, as constant dollars and percentage of compensation, are approximately the same 

under the current law and Senate bill assumption bases.

—

the current law and Senate bill assumption bases—the PSRHBF would 

become exhausted in 14 years, in 2026. USPS would have zero reported 

costs for retiree health benefits until then. Beginning in 2026, USPS 

would begin paying its share of premium payments. By 2040, under the 

current law assumption basis, this annual cost is projected to be about 

$13 billion, not much different than the annual prefunding cost in fiscal 

year 2040 under the four different prefunding approaches. The big 

Pay-as-You-Go Funding
 

Page 38 GAO-13-112 U.S. Postal Service

difference would be in the unfunded liability. Under this Pay-as-You-Go 

Approach, the unfunded liability in fiscal year 2040 would be about $250 

billion, which would be about $130 billion in 2012 dollars, and about 310 

percent of USPS’s projected annual compensation cost. By comparison, 

under the modified Senate prefunding approach, which produces the 

largest unfunded liability of the four prefunding approaches, the unfunded 

liability in fiscal year 2040 would be about 85 percent of projected annual 

compensation cost.

In summary, once the trust fund became exhausted, annual pay-as-yougo payments would not become significantly more onerous than annual 

prefunding payments, at least through the end of our projection period in 

fiscal year 2040. However, the Pay-as-You-Go Approach would produce 

a vastly bigger unfunded liability—which could eventually require an 

escalation of postal rates or reduction in costs. 

We examined a second variation of pay-as-you-go funding, an approach 

that the USPS OIG analyzed and reported on in February 2012.49 Under 

this approach, USPS would stop making prefunding payments and would 

pay its share of premium payments for retirees and beneficiaries as they 

become due. The existing fund would be left to grow with interest, with no 

other cash inflow or outflow. The intention would be for this to continue 

only until USPS’s liability was fully funded.50

The USPS OIG estimated that the fund would grow from $44 billion (its 

September 30, 2011, level) to $90 billion in 21 years. The USPS OIG did 

not estimate the liability or unfunded liability in 21 years, but noted that 

while the liability is not a static amount, and has risen over time 

historically, it had not changed significantly over the prior 3 years, going 

The USPS OIG has 

informally referred to this approach as the “Seal and Grow” Approach.

 

49Letter from USPS OIG Inspector General David C. Williams to Senator Bernie Sanders, 

February 6, 2012.

50If the liability were to become fully funded under this approach, the fund would then 

become “unsealed.” USPS’s share of premium payments would then start to be paid out 

of the PSRHBF, and USPS would start making prefunding payments into the PSRHBF to 

cover normal costs. As discussed earlier, the achievement of full funding does not mean 

that there are no further prefunding payments.
 

Page 39 GAO-13-112 U.S. Postal Service

from $87 billion at fiscal year-end 2009 to $91 billion at fiscal year-end 

2010 to $90 billion at fiscal year-end 2011.51

Some have concluded from this analysis that USPS’s unfunded liability of 

$46 billion would be eliminated in 21 years by adopting this approach.

However, our projections of the unfunded liability, which incorporate 

OPM’s projections of the liability itself, show that the liability, in fact, would 

increase, resulting in a significant increase in the unfunded liability rather 

than its elimination. Specifically, we project that the unfunded liability 

would grow from $46 billion at fiscal year-end 2011 to $86 billion at fiscal 

year-end 2032 under this approach. The $86 billion estimate is equal to 

$53 billion in 2012 dollars and 139 percent of fiscal year 2032 

compensation (up from 96 percent for fiscal year 2011).52

The USPS OIG’s projection of assets – from $44 billion to $90 billion over 

21 years – represents a 3.5 percent annual return over this period. Under 

our projection, using the current law assumption basis, assets grow from 

$44 billion to $120 billion over this period, at the assumed return of 4.9 

percent, but the liability grows from $90 billion to $206 billion, or at an 

average rate of 4.0 percent per year. This projected liability growth 

reflects the net effect of accretions for interest, accretions for normal cost 

(with a reduced workforce), and reductions as premium payments are 

made, thereby discharging a portion of the liability. The projected liability 

would have to be 42 percent lower than projected for the unfunded liability 

to disappear by 2032. For this to occur (in the absence of cuts to 

benefits), future experience would have to be much more favorable than 

predicted by the assumptions.

Nonetheless, under this Seal and Grow Approach the funded percentage 

is projected to improve over time. Because premium payments are 

projected to exceed normal cost for most of the projection period, the 

liability is projected to grow at a slower rate than assets (as noted in the 

preceding paragraph). As a result, the liability is projected to be 70 

percent funded by 2040, close to the 73 percent projected funded 

 

51The liability rose to $93.6 billion at fiscal year-end 2012, a figure not known at the time of 

the USPS OIG’s analysis in February 2012.

52This estimate uses the current law assumption basis. Under the Senate bill assumption 

basis, the corresponding figure is a 2032 unfunded liability of $88 billion, which is equal to 

$49 billion in 2012 dollars and 127 percent of 2032 compensation.
 

Page 40 GAO-13-112 U.S. Postal Service

percentage under the Modified Senate Approach.53 Thus, like the 

Modified Senate Approach, the Seal and Grow Approach is projected to 

result in a significant improvement in the funded percentage over the 

projection period, while still leaving a substantially larger unfunded liability 

relative to the Modified Current Law, House, and Administration 

Approaches. Moreover, USPS’s payments under the Seal and Grow 

Approach would be more backloaded than under the Modified Senate 

Approach—with lower payments in the short term and higher payments 

later—making it more affordable in the short term but resulting in higher 

estimated unfunded liabilities in the short term as well.

To assist Congress in considering the various funding approaches, we 

identified some factors to consider in assessing what would constitute 

reasonable short-term and long-term funding requirements. We also 

examined the prefunding requirements of other organizations that offer 

retiree health benefits to their employees. Given that USPS is intended to 

be a self-sustaining entity funded almost entirely by postal revenue, we 

have previously stated that USPS should prefund its retiree health benefit 

liability to the maximum extent that its finances permit.

The following considerations should be taken into account when 

assessing the various funding approaches for USPS.

Consideration of whether to prefund retiree health benefits includes the 

associated consequences of the potential inability to fund the remaining 

unfunded liability or keep up with annual premium payments. In general, 

rationales for prefunding post-retirement benefits for any enterprise, 

whether for pension benefits or retiree medical benefits, can include the 

following:

• Achieving an equitable allocation of cost over time by paying for 

retirement benefits during the employees’ working years, when 

such benefits are earned. For USPS, the relevant cost allocation is 

between current and future postal ratepayers. The rationale is to have 

 

53These estimates are under the current law assumption basis. Under the Senate bill 

assumption basis, the corresponding projected funded percentages in 2040 are 76 

percent under the Seal and Grow Approach and 73 percent under the Modified Senate 

Approach.

Key Considerations 

for Assessing Funding 

Approaches 

Funding Approach 

Considerations 

Rationale for Prefunding
 

Page 41 GAO-13-112 U.S. Postal Service

current ratepayers pay for the full cost of compensation for current 

employees, including the portion of such current compensation that is 

not paid until these current employees are retired. However, as noted 

earlier, an additional consideration is the “legacy” unfunded liability 

that was not paid by ratepayers in prior years. The conceptual 

rationale for prefunding does not answer the question of who should 

be responsible for a legacy unfunded liability.

• Protecting the future viability of an enterprise by not saddling it 

with bills later after employees have already retired. In the case of 

USPS, this consideration is complicated by the organization’s financial 

condition.

• Providing greater benefit security to employees, retired 

employees, and their beneficiaries. Funded benefits protect against 

an inability to make payments later on, and can also make the 

promised benefits less vulnerable to cuts. In the private sector, failure 

to prefund retiree health benefits may have contributed to private 

employers terminating or reducing such benefits. In the state and local 

government sector, large unfunded liabilities for both retiree health

and pension benefits have led to pressure and actions to trim the 

levels of these benefits. Others have contended that the mere 

requirement to account for the cost of these benefits in employers’ 

financial reporting has led to benefits being cut. While an analysis of 

the cause of retiree health benefit cuts in other sectors is beyond the 

scope of our research, failure to prefund these benefits is a potential 

benefit security concern.

• Providing security to any other party that might become 

responsible for part of the liability in the event of an enterprise’s 

inability to pay for the remainder of the unfunded liability. For 

example, the Pension Benefit Guaranty Corporation is responsible for 

backing up private sector pension benefits when companies are 

unable to do so. According to the OPM OIG, the consequences if 

USPS could not pay for its retiree health benefits are unclear.54

 

54OPM Office of Inspector General, A Study of the Risks and Consequences of the USPS 

OIG’s Approaches to Change USPS’s Funding of Retiree Benefits (Washington, D.C.: 

Feb. 28, 2011). 
 

Page 42 GAO-13-112 U.S. Postal Service

The effect of trade-offs among the different approaches on a number of 

issues would need to be considered, including trade-offs affecting:

• USPS’s financial condition. Protecting the future viability of USPS 

by not overwhelming it with bills and unfunded liabilities for the cost of 

employee benefits after these employees have already retired is 

complicated by the organization’s immediate cash flow challenges 

including having reached the maximum of its borrowing authority. 

Prefunding payments under current law have contributed about $21 

billion toward USPS’s $25 billion of net losses over the past 5 years. If 

USPS continues to experience operational losses even before 

factoring in prefunding requirements, prefunding would add to such 

losses. As such, USPS would need to find larger cuts in operational 

costs now in order to have the cash to make its short-term prefunding 

payments. On the other hand, to the extent short-term prefunding 

payments are postponed, greater payments would be required later, 

supported by a smaller base of mail volume, with price caps further 

limiting revenue. Such a scenario would produce even greater 

pressure for cuts in operational costs later as well as raise concerns 

about USPS’s ability to make prefunding payments, when unfunded 

liabilities would be greater because of the deferral of prefunding 

payments.

USPS’s OIG has stated that as an alternative to additional prefunding, 

USPS’s extensive real estate holdings could provide collateral for the 

remaining unfunded liability.55 However, USPS has stated that it does not 

believe that USPS-occupied real estate would be a suitable asset within 

the PSRHBF because employer-occupied real estate cannot be readily 

sold to provide cash when needed to pay benefits.56

Some comprehensive proposals to address USPS’s financial condition 

have included provisions to transfer USPS’s FERS pension surplus from 

the Civil Service Retirement and Disability Fund (CSRDF) to USPS; such 

In addition, we 

would note that in the event of USPS’s being unable to fund its liabilities, 

USPS might have other debts and obligations in addition to unfunded 

retiree health care liabilities for which any available real estate would be 

needed.

 

55U.S. Postal Service Office of Inspector General, “Pension and Retiree Health Care 

Funding Levels: Management Advisory Report,” FT-MA-12-002 (June 18, 2012). 

56FT-MA-12-002. 

Trade-offs
 

Page 43 GAO-13-112 U.S. Postal Service

a transfer could be viewed as a short-term source for some of the 

required PSRHBF prefunding payments. However, the most recent 

estimate of this surplus is significantly lower than the two prior estimates.

We have previously reported on options and considerations with regard 

to this surplus.57

• Size of the annual payment and the unfunded liability. More nearterm funding reduces payments and the amount of the unfunded 

liability later, while less near-term funding produces larger unfunded 

liabilities and requires higher funding payments later.

Use of any FERS surplus would not be a long-term 

solution to address USPS’s financial outlook and operational imbalances.

The unfunded liability can also be viewed in a larger context. From fiscal 

years 2007 through 2010, USPS contributed a total of $17.9 billion to the 

PSRHBF. Over this same period, USPS increased its debt to the U.S. 

Treasury from $2.1 billion at fiscal year-end 2006 to $12.0 billion at fiscal 

year-end 2010, an increase of $9.9 billion.58

• Allocation of costs between current and future postal ratepayers.

More near-term funding assigns more cost to current postal 

ratepayers that is reflected in rates, while less near-term funding 

assigns more cost to future ratepayers. As noted above, a 

complicating factor is the existing unfunded liability, which 

conceptually should have been paid by prior ratepayers but was not. 

Instead, this legacy cost is being spread among current and future 

ratepayers since fiscal year 2007. 

Thus, from fiscal year-end 

2006 to 2010, USPS made payments to the PSRHBF of $17.9 billion 

while borrowing an additional $9.9 billion from U.S. Treasury.

• Allocation of risks. Less prefunding now increases the risk that later 

some party(ies) could be called upon to pick up a greater share of the 

 

57GAO, U.S. Postal Service: Allocation of Responsibility for Pension Benefits between the 

Postal Service and the Federal Government, GAO-12-146 (Washington, D.C.: Oct. 13, 

2011). The amount of USPS’s FERS pension surplus that we cited in this report was $6.9 

billion, which was according to the then-most-recent actuarial analysis as of September 

30, 2009. More recent actuarial analyses put this surplus at $10.9 billion as of September 

30, 2010, and $2.6 billion as of September 30, 2011. Over this same period, estimates of 

USPS’s CSRS pension surplus went from a deficit (unfunded liability) of $7.3 billion as of 

September 30, 2009, to a surplus of $1.6 billion as of September 30, 2010, to a deficit of 

$17.8 billion as of September 30, 2011. 

58USPS has since then reached its borrowing limit of $15.0 billion.
 

Page 44 GAO-13-112 U.S. Postal Service

costs if USPS could not make its payments or pay off its unfunded 

liability. Another risk is that the level of employee pay and benefits 

may not be sustainable and could be reduced. As stated earlier, 

OPM’s OIG reported that the exact consequences of these risks are 

unclear.59

Another consideration with regard to the timing of prefunding payments is 

whether Congress wishes to continue requiring fixed prefunding 

contributions that are significantly in excess, through 2016, of actuariallydetermined amounts. The House Bill largely retains this Current Law 

Approach, while the Senate Bill and the Administration Approach would 

produce a more consistent funding pattern.

Achieving reasonable postal rates from an equitable and 

consistent allocation of costs for pay and benefits earned during 

employees’ work years could provide greater benefit security to 

employees, retirees, and beneficiaries.

The Senate Bill targets an 80 percent funding level while the other 

approaches target a 100 percent funding level. The Senate committee 

report accompanying the Senate Bill stated that the committee set an 80 

percent target-funding level on the presumption that USPS, if necessary, 

had additional assets it could draw upon to meet its liabilities.60 As 

previously stated, USPS’s OIG report stated that USPS’s extensive real 

estate holdings could provide collateral for the remaining unfunded 

liability, but we would note that in the event of USPS’s being unable to 

fund its liabilities, USPS might have other debts and obligations in 

addition to an unfunded retiree health benefit liability for which any 

available real estate would be needed. If an 80 percent funding target 

level were selected because of concerns about USPS’s ability to achieve 

a 100 percent target level within a particular time frame, an additional 

option could be to build in a schedule to achieve 100 percent funding in a 

subsequent time period after the 80 percent level is achieved.61

 

59OPM Office of Inspector General, A Study of the Risks and Consequences of the USPS 

OIG’s Approaches to Change USPS’s Funding of Retiree Benefits (Washington, D.C.: 

Feb. 28, 2011). 

60S. Rep. No. 112-143, at 5 (2012). 

61As noted earlier, as long as USPS continues in operation with the retiree health plan 

intact, additional prefunding contributions would still be needed, even after full funding was 

achieved, for the annual growth in the liability for the cost of benefits attributable to 

ongoing employee service. 

Fixed versus Actuarially 

Determined Payments 

Targeted Funding Level 
 

Page 45 GAO-13-112 U.S. Postal Service

As discussed earlier, the issuance of SFFAS 33 had the effect of creating 

a divergence between the actuarial assumptions used in determining 

USPS’s funding requirements for PSRHBF and those used in determining 

its funding requirements for CSRS and FERS. Another consideration is 

whether Congress desires more uniform funding assumptions across 

these programs. As noted, the funding assumptions for PSRHBF under 

current law, which are retained in the House Bill and Administration 

Approach, are now, post-SFFAS 33, based on 10-year historical 

averages. Assumptions that are based on historical averages can 

potentially diverge significantly from either current economic 

circumstances or from the current long-term economic outlook. The 

assumption criteria in SFFAS 33 were designed to accomplish financial 

reporting objectives rather than funding objectives.

We also reviewed the prefunding requirements for other organizations 

that offer retiree health benefits to their employees: private sector entities, 

state and local governments, and other federal entities. Although other 

federal, state and local, and private sector entities generally are not 

required to prefund retiree health care benefits, a few do prefund at 

limited percentages of their total liability. However, most are required to 

recognize the future costs of these benefits in their financial reporting if 

they follow generally accepted accounting principles. Although 

recognizing the cost of retiree health benefits for financial reporting 

purposes is a separate issue from the question of whether to prefund 

these benefits, such reporting does enhance the transparency of the cost 

of these benefits. USPS accounts for these benefits using private-sector 

multiemployer accounting rules, under which USPS does not recognize 

the unfunded liability for these benefits on its balance sheet.62 In 2002, 

GAO suggested that USPS reconsider its method of accounting for these 

benefits.63

In addition, although prefunding is not required, a number of private, 

state, local, and federal entities have elected to prefund some percentage 

 

62USPS does, however, disclose the value of its liability and unfunded liability (termed 

“obligation” rather than “liability,” as discussed earlier), and the changes in such values 

from the prior year, in the footnotes to its financial statements and in its Management’s 

Discussion and Analysis that accompanies the statements.

63GAO, U.S. Postal Service: Accounting for Postretirement Benefits, GAO-02-916R

(Washington, D.C.: Sept.12, 2002). 

Basis for Assumptions

Comparison with Other 

Entities 
 

Page 46 GAO-13-112 U.S. Postal Service

of their retiree health benefits. For example, Standard & Poor’s (S&P) 

reported that 126 of the 296 companies in the S&P 500 that offered “other 

post-employment benefits” (OPEB)64 prefunded some percentage of the 

associated liabilities, while the USPS OIG has reported that 38 percent of 

Fortune 1000 companies that offer retiree health care benefits prefund 

them, at a median funding level of 37 percent.65 Further, in November 

2009, we found that 18 states and 13 of the 39 largest local governments 

had set aside at least a combined $25 billion in assets to cover their 

OPEB liabilities.66

Although the majority of federal civilian agencies do not prefund these 

benefits, a few small, civilian, federal agencies do so. In addition, the 

Department of Defense (DOD) prefunds its retiree health benefits for 

Medicare-eligible retirees and beneficiaries, with a 100 percent target 

funded percentage. This fund was started in 2002 in reaction to rapidly 

rising health care costs. The fund had assets of $166 billion as of 

September 30, 2010, which represented a funding level of 38 percent.67

DOD does not prefund its pre-Medicare-eligible retiree health benefits, 

although its independent Board of Actuaries has recommended that it 

consider prefunding these costs as well, in order to reflect the full costs of 

these future benefits and promote a better understanding of the 

program’s value.68

While private sector, state and local government, and other federal 

entities generally are not required to prefund these benefits, most are 

required to recognize the future costs of these benefits on an accrual 

basis as they are earned, rather than when they are paid, in their financial 

reporting. Standards governing financial reporting (i.e., accounting) are 

 

64Retiree health benefits generally make up the largest part of OPEB. The “other” in 

OPEB was meant to refer to post-employment benefits other than pensions. 

65FT-MA-12-002.

66GAO, State and Local Government Retiree Health Benefits, Liabilities are Largely 

Unfunded, but Some Governments Are Taking Action, GAO-10-61 (Washington, D.C.: 

Nov. 30, 2009).

67Department of Defense, Office of the Actuary, Valuation of the Medicare-Eligible Retiree 

Health Care Fund (Alexandria, VA: Sept. 30, 2010)

68Department of Defense, Board of Actuaries, Report to the President and the Congress 

on the DOD Medicare-Eligible Retiree Health Care Fund (Arlington, VA: Dec. 30, 2009).
 

Page 47 GAO-13-112 U.S. Postal Service

separate and apart, and under different jurisdiction, from any laws, 

regulations, or rules governing prefunding.69

In contrast to most other federal entities, USPS reports under private 

sector (FASB) accounting standards, and follows FASB’s multiemployer 

accounting rules, rather than FASB’s single-employer accounting rules, in 

reporting its participation in FEHBP. These multi-employer standards 

exempt employers from reporting the cost of these retirement benefits on 

an accrual basis. Instead, expense for a year is set equal to required cash 

payments—which currently for USPS means the sum of its required 

prefunding payment and its share of premium payments that it pays 

directly—while no liability is shown on the USPS balance sheet except for 

any required payments that have been missed (such as the missed fiscal 

year 2011 and 2012 prefunding payments). In contrast, if USPS were 

following FASB’s single-employer accounting standards, USPS would 

show a liability on its balance sheet for the entire unfunded liability, and 

expense for a year would be an actuarially determined accrual cost 

independent of whether USPS had to make a small or large prefunding 

payment for that year. In 2002, the Comptroller General wrote to the 

Postmaster General and, based on a reassessment of the applicability of 

multiemployer versus single-employer accounting standards to USPS, 

suggested that USPS reassess its accounting treatment of retiree health 

benefits, and consider accounting for its retiree health benefits on an 

accrual basis, meaning, to consider adopting the single-employer

accounting procedures. A basic premise behind the exemption from 

accrual accounting for multiemployer plans was that the liability for an 

individual employer would be difficult to determine and would be of limited 

value, a premise that is not the case for USPS.70

Recognizing the cost of retiree health benefits on an accrual basis for 

financial reporting enhances the transparency of the cost of these 

benefits even in the absence of prefunding. As a result, in situations 

where prefunding requirements do not exist or are significantly relaxed or 

 

69The financial reporting rules vary by sector, and are generally governed by the FASB in 

the private sector, the GASB for state and local governments, and the FASAB for federal 

agencies and the federal government as a whole. The particular accrual rules within each 

sector vary in a number of ways, regarding such factors as actuarial methods and 

assumptions, amortization periods or lack thereof, and recognition on the employer’s 

balance sheet. 

70GAO-02-916R. 
 

Page 48 GAO-13-112 U.S. Postal Service

eliminated, accrual accounting provides an important function by 

recognizing the costs of these future benefits even in the absence of 

prefunding. It can also be the case that a year’s accrual cost can be lower 

than the amount funded. For example, the fixed payments required under 

current law may well be higher than the annual accrual cost that USPS 

would recognize under single employer accounting, although, again, the 

full unfunded liability would be recognized on the balance sheet.

Note that there is one other significant program, federal workers’ 

compensation under the Federal Employees’ Compensation Act, for 

which USPS’s financial reporting is based on actuarial projections of 

future benefits rather than on its annual required cash payments. USPS 

pays the Department of Labor each year for the cash benefits to current 

beneficiaries, but USPS records a liability on its balance sheet for the 

entire actuarial present value of future benefits for those who have 

already been injured, and recognizes the growth in this liability as an 

expense each year. This unfunded FECA liability on USPS’s balance 

sheet was $17.6 billion as of September 30, 2012.

Timely action is essential in addressing the funding of USPS’s retiree 

health benefits. We have suggested that Congress must take action to 

address the uncertainty related to: 

1) USPS’s inability to meet the current retiree health prefunding 

requirements, 

2) reducing the unfunded retiree health benefit liability over time,

3) determining the proper allocation of costs between current and 

future ratepayers, and 

4) enacting comprehensive postal reform legislation that would 

improve prospects for USPS’s long-term financial viability. 

USPS’s recent defaults on its retiree-health- prefunding payments and its 

inability to borrow now that it has reached its $15 billion borrowing limit 

create an even more urgent need for congressional action. The continued 

uncertainty around resolution of USPS’s financial problems and the 

funding of these payments creates uncertainty for mailers in developing 

their business plans, an uncertainty that could negatively affect mailers’

willingness to use USPS’s services. As noted earlier, USPS has also 

proposed withdrawing from FEHBP and administering its own health care 

Concluding 

Observations 
 

Page 49 GAO-13-112 U.S. Postal Service

plan for both workers and retirees, a proposal that is the subject of our 

ongoing work in another study. 

Congress should also consider how quickly and to what level prefunding 

of retiree health benefits should occur. As previously cited, deferrals and 

lower payments in the short-term will reduce USPS’s reported financial 

losses in the short-term, but would increase its unfunded retiree health

benefit liability and require larger annual payments in the future; yet at the 

same time, currently required short-term payments are higher than what 

would be required under the actuarial approach that begins in 2017. Both 

of these points raise issues regarding fairness to future and current 

ratepayers. Furthermore, postal ratepayers provide USPS with funding, 

but as mail volumes decline, there may be fewer ratepayers in the future 

to pay for deferred costs. In addition, the less USPS reduces its retiree 

health unfunded liability, the greater the potential consequences, with 

unclear impact, if USPS is ultimately unable to pay this unfunded liability. 

In considering the options for USPS to address its retiree health benefit 

liability, Congress should keep in mind that stopping or deferring 

prefunding of these benefits would serve as short-term relief, but would 

also increase the risk that USPS may not be able to make future 

payments if its core business continues to decline. Therefore, we 

continue to believe it is important that USPS prefund its retiree health 

benefit liability to the maximum extent that its finances permit.

None of the funding approaches will be viable unless USPS has the 

ability to make the required payments. Without congressional or further 

USPS actions to cut postal costs, USPS will not have the finances 

needed to make annual payments in the short term and reduce its retiree 

health unfunded liability over the long term. USPS has stated that it will 

be unable to make any prefunding payment toward reducing its retiree 

health unfunded liability if it continues to experience cash flow difficulties. 

While USPS may have limited control of its revenue stream because of

advances in technological communication, it is important that USPS

reduce its expenses to avoid even greater financial losses, repay its 

outstanding debt, and increase capital for investment. Consequently, as 

we have repeatedly stated, Congress and USPS need to reach 

agreement on a comprehensive package of actions to improve USPS’s 

financial viability. In previous reports, we have provided strategies and 

options, to both reduce costs and enhance revenues, that Congress could 

consider to better align USPS costs with revenues and address 

constraints and legal restrictions that limit USPS’s ability to reduce costs 

and improve efficiency. Implementing strategies and options to better 

align costs with revenues may better enable USPS to be in a financial 
 

Page 50 GAO-13-112 U.S. Postal Service

position to prefund its retiree health benefit liability for its over one million 

active and retired postal employees and their beneficiaries.

We provided a draft of this report to USPS, the USPS OIG, and OPM for 

review and comment. USPS and the USPS OIG provided comments, 

which are reprinted in appendixes III and IV, respectively. USPS and the 

USPS OIG did not disagree with the report’s conclusions and analysis 

about the trade-offs involved with the alternative funding approaches, but 

both commented that USPS cannot afford to make prefunding payments 

and provided additional context. OPM had no comments but provided 

technical clarifications, which we incorporated into the report as 

appropriate. 

USPS agreed that comprehensive reform is necessary to achieve 

financial sustainability. It also recognized its obligation to provide 

effective, affordable health benefits to its employees and retirees, but said 

that it does not have the financial resources to make prefunding 

payments required by current law. Further, USPS said that releasing this 

report is inappropriate because, in its view, the solution to managing its 

health care costs is to reduce the cost of future health care coverage by 

allowing USPS to sponsor its own medical plan. In response to USPS’s 

comment, we noted in the report that adopting any of the prefunding 

approaches analyzed in this report would not preclude USPS from 

continuing to pursue its proposal to administer its own plan, and that any 

resulting expected cost savings would be reflected in a lower unfunded 

liability and lower actuarially determined prefunding payments than 

otherwise. As USPS noted, we are currently reviewing USPS’s proposal 

to administer its own plan.

The USPS OIG concurred with our analysis of the trade-offs among the 

alternative funding approaches that would result in paying more now or in

the future, but stated its concern that the report needed additional context 

in four areas: 1) historical, 2) financial, 3) use of other assets to satisfy the 

retiree health benefit obligation, and (4) the problems with prefunding.

First, the USPS OIG stated that USPS started prefunding its retiree health 

benefits as a result of the discovery that, because of external fund 

management misjudgments, it was on track to seriously overfund its 

pension obligations by $78 billion. The USPS OIG also said that a 

decision to turn a mistake into a second prefunding obligation created its 

own problems, including a 10-year schedule of prefunding payments that 

was structured toward a 100 percent funding goal, and that the 

Agency Comments

and Our Evaluation
 

Page 51 GAO-13-112 U.S. Postal Service

aggressive payment schedule appears to have been set based on 

byzantine “budget scoring” considerations rather than actuarial 

assumptions or an evaluation of USPS’s ability to make the payments. 

In our report, we noted USPS’s reduction in pension contributions to the 

Civil Service Retirement System occurred as a result of the Postal Civil 

Service Retirement System Funding Reform Act of 2003, which switched 

the actuarial basis for future contributions to “dynamic” assumptions from 

the “static” assumptions that OPM projected would result in overfunding. 

Further, we pointed out that the 10-year schedule of prefunding payments 

for fiscal years 2007 through 2016 was not based on an actuarial 

assessment, and that the remaining required payments through fiscal 

year 2016 are significantly in excess of what would be calculated under 

the actuarial approach that begins in fiscal year 2017. We also noted that 

USPS proposed prefunding to Congress in 2003. 

Second, the USPS OIG discussed several points in a financial context. It 

said that USPS has never been able to afford a single payment—that it 

has either borrowed from the U.S. Treasury to make prefunding payments 

to date or that it has defaulted on them. However, we noted in our report 

that from fiscal year-end 2006 to 2010, USPS made total prefunding 

payments of $17.9 billion while borrowing an additional $9.9 billion from 

the U.S. Treasury. The USPS OIG also stated that now that the USPS 

has reached the limit of the amount it can borrow, it can no longer make 

the payments. We noted in our report that none of the funding 

approaches will be viable unless USPS has the ability to make the 

required payments, and that a comprehensive package of actions is 

needed to improve USPS’s financial viability. The USPS OIG also said 

that its “seal and grow” proposal was made in the context of USPS’s 

urgent financial situation and was meant as a temporary—not 

permanent—measure, and that we mistakenly represented it as a 

permanent payment plan. Our report actually noted that the Seal and 

Grow Approach was intended to continue until USPS’s liability was fully 

funded—meaning, not thereafter; we added additional wording to clarify 

this point. The USPS OIG also pointed out that USPS has substantially 

funded its retiree benefit programs, with its pensions fully funded and its 

retiree health benefits half funded, with enough to cover current retirees. 

We did note in our report that the retiree health benefit liability is 49 

percent funded and that approximately half of the liability is for current 

retirees. As for pensions, USPS reported in its most recent annual 

financial report (10-K) for fiscal year 2012 that it had an unfunded pension 

liability of almost $16 billion, which represented a 95 percent funded 

percentage (i.e., close to fully funded), based on a projected year-end 
 

Page 52 GAO-13-112 U.S. Postal Service

fund balance of $285 billion and a liability of $300 billion; the prior year’s 

estimate had indeed been a pension surplus. 

Third, the USPS OIG stated that our report did not adequately explore the 

use of other assets USPS holds as a means of satisfying its retiree health 

benefit obligation. The USPS OIG noted that it has reported on two 

sources of assets worth billions that could be used to cover any unfunded 

obligation, including 1) an estimated $85 billion in real estate holdings and

2) surpluses in USPS’s pension funds. As we noted in our report, USPS 

has stated that it does not believe that USPS-occupied real estate would 

be a suitable asset within the PSRHBF because employer-occupied real 

estate cannot be readily sold to provide cash when needed to pay 

benefits.71

Finally, the USPS OIG commented that our report should examine the 

problems of prefunding and examine why no business or government 

entity has taken advantage of prefunding, and that making prefunding 

payments at the current levels will bankrupt USPS. Our report did 

discuss these issues, beginning with the section entitled, Comparison 

with Other Entities. While our report did not examine comprehensively 

the reasons for other entities’ prefunding decisions, we noted that 

although prefunding is not required, a number of private, state, local, and 

federal entities have elected to prefund some percentage of their retiree

health benefits, as follows: 

 We noted that in the event of USPS’s being unable to fund its 

liabilities, USPS might have other debts and obligations in addition to 

unfunded retiree health benefit liabilities for which any available real 

estate proceeds would be needed. We noted that we reported on options 

and considerations with regard to any USPS pension surplus (in particular 

regarding FERS) in a prior report.

• Standard & Poor’s (S&P) reported that 126 of the 296 companies 

in the S&P 500 that offered “other post-employment benefits” 

(OPEB) prefunded some percentage of the associated liabilities; 

• the USPS OIG reported that 38 percent of Fortune 1000 

companies that offer retiree health benefits prefund them, at a 

median funding level of 37 percent; 

 

71FT-MA-12-002 
 

Page 53 GAO-13-112 U.S. Postal Service

• 18 states and 13 of the 39 largest local governments had set 

aside at least a combined $25 billion in assets to cover their 

OPEB liabilities; and 

• the Department of Defense prefunds its retiree health benefits for 

Medicare-eligible retirees and beneficiaries, with a 100 percent 

target funding percentage, and that this fund, which was started in 

2002 in reaction to rapidly rising health care costs, had assets of 

$166 billion as of fiscal year-end 2010. 

We also recognized USPS’s inability to meet the current retiree health

prefunding requirements along with the need for comprehensive 

legislative action. Specifically, we said, “None of the funding approaches 

will be viable unless USPS has the ability to make the required payments. 

Without congressional or further USPS actions to cut postal costs, USPS 

will not have the finances needed to make annual payments in the short 

term and reduce its retiree health benefit liabilities over the long term.”

As arranged with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days after its 

date. At that time, we will send copies of this report to the appropriate 

congressional committees, the Postmaster General, OPM, the USPS 

Inspector General, and other interested parties. In addition, the report will 

be available at no charge on GAO’s Web site at http://www.gao.gov. 
 

Page 54 GAO-13-112 U.S. Postal Service

If you or your staffs have any questions on this report, please contact 

Frank Todisco at todiscof@gao.gov; Lorelei St. James at 

stjamesl@gao.gov: or call (202) 512-2834. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. Contact information and key contributors to the report 

are listed in appendix V.

Sincerely yours, 

Frank Todisco Lorelei St. James

Chief Actuary Director

Applied Research and Methods Physical Infrastructure Issues

The undersigned meets the qualification standards of the American 

Academy of Actuaries to render the actuarial findings contained in this 

report.

Frank Todisco, FSA, MAAA, EA

Chief Actuary 
Appendix I: Objectives, Scope, and 

Methodology

Page 55 GAO-13-112 U.S. Postal Service

This report (1) describes the status and financial outlook of the Postal 

Service Retiree Health Benefits Fund (PSRHBF), (2) analyzes how 

alternative proposals for funding retiree health benefits could affect future 

USPS payments and unfunded liabilities, and (3) determines key 

considerations for policymakers assessing the alternative proposals or 

other approaches.

To describe the status and financial outlook of the PSRHBF, we reviewed 

and summarized USPS financial data regarding payments made to the 

fund, interest earned from such contributions, overall fund balance, and 

retiree health benefit liability. We also reviewed our prior work and 

reviewed and summarized reports and data from USPS and others on 

how USPS’s financial condition has changed since 2006. We reviewed 

relevant statutes, proposed legislation, and sections of the President’s 

budget request for fiscal year 2012 pertaining to USPS’s health and 

pension benefit programs. We also interviewed USPS and OPM officials 

on the status and financial outlook of the PSRHBF.

To determine the impact on USPS payments and unfunded liabilities 

under alternative approaches to fund retiree health benefits, we analyzed 

and compared current funding requirements and five alternatives. We 

interviewed USPS officials on the USPS’s ability to meet future mandated 

payments and to obtain information on current and projected employee 

(FTE) levels, compensation, and revenue. In addition, we met with OPM 

officials to discuss projection methodology, and assumption selection, for 

using the data provided by USPS to project future premium payments, 

normal costs, and liabilities. OPM provided us projections of these 

amounts, which we further analyzed to project future prefunding 

contributions and unfunded liabilities under the different approaches to 

prefunding that we analyzed. Additional information on data, 

assumptions, and methods is provided below.

To determine key factors for policymakers to consider when assessing 

alternative approaches, we used our own actuarial judgment and 

expertise. We also examined prefunding requirements for retiree health 

benefits, and prefunding behavior, of other entities (federal, state, and 

local governments and private sector). In addition, we examined financial 

reporting requirements applicable to other entities for these benefits, 

reviewing relevant accounting standards promulgated by the Financial 

Accounting Standards Board (FASB), Governmental Accounting 

Standards Board (GASB), and Federal Accounting Standards Advisory 

Board (FASAB); we compared these standards to USPS’s financial 

reporting for these benefits.

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 56 GAO-13-112 U.S. Postal Service

We relied on OPM’s actuarial projections of normal cost, accrued liability 

(referred to in the report, and in the remainder of this appendix, simply as 

“liability”) and premium payments. We obtained data on workforce 

projections from USPS, as described further below, which we projected 

further and supplied to OPM for use in the projections. OPM’s valuation of 

the cost of USPS’s retiree health benefit obligations entails the collection 

and analysis of participant data and claims cost data, the setting of 

demographic and economic assumptions, and the application of these 

data and assumptions to the provisions of the benefit program. We had 

extensive discussions with OPM regarding its valuation methodology and 

were satisfied with the reasonableness of the approach with regard to the 

issues discussed. However, we did not otherwise audit or evaluate OPM’s 

actuarial assumptions, methodology, calculations, or underlying data.

Such an evaluation would have required a substantial amount of 

additional work beyond the scope of our assignment, and would also 

have required engaging additional actuarial resources with particular 

expertise in the valuation of health care benefits. For projecting the most 

recent valuation results into the future, we selected the methodology and 

projection assumptions in consultation with OPM. Additional detail on 

OPM’s methods and assumptions is available from OPM.

It should be understood that projections of this type contain a significant 

degree of uncertainty, as discussed further in the section of the report on 

Sensitivity to Assumptions. Nonetheless, given the magnitude of the 

liabilities and the importance of being able to pay for these benefits, 

reasonable projections of these costs and liabilities provide essential 

information for enabling responsible stewardship of resources.

OPM provided us with projected normal cost and premium payments for 

each year through 2040. OPM calculated and provided us with projected 

liability as of three points: the end of 2010 (the measurement date of the 

most recent data collection at the time of our request), the end of 2021, 

and the end of 2040. We used a linear interpolation to estimate the 

liability for each of the intervening years. For each future year, we 

calculated the prefunding contribution, based on the normal cost and 

unfunded liability, when an actuarial approach applied; rolled the assets 

forward by adding the prefunding contribution and investment income and 

subtracting premium payments, as applicable; calculated the next year’s 

unfunded liability based on these projected assets and the projected 

liability for that year; calculated the next year’s prefunding contribution 

based on this new unfunded liability; and so on to the end of the 

projection period. The calculation of the prefunding contribution—as well 

as the applicability of fixed versus actuarially determined contributions 

Additional Information on 

Data, Assumptions, and 

Methods Underlying the 

Actuarial Projections
Appendix I: Objectives, Scope, and 

Methodology

Page 57 GAO-13-112 U.S. Postal Service

and whether premium payments came out of the fund—was based on the 

provisions of the prefunding approaches we modeled, as described in the 

main body of this report (table 2 and preceding text). Where an actuarially 

determined prefunding contribution was used, it was the sum of the 

normal cost and an amortization payment (mortgage-style amortization 

calculation) calculated to pay off the unfunded liability in equal annual 

installments. Note that under the terms of the Senate Bill, which uses an 

80 percent funded percentage target instead of 100 percent, the 

amortization is based on [(0.80*Liability) – Assets], rather than 

[0.80*(Liability – Assets)], and 100 percent of the normal cost is added to 

the amortization payment, rather than 80 percent of the normal cost.

OPM’s projections of liabilities are based on the current level of plan 

health benefits and do not reflect any proposals to reduce the actuarial 

value of benefits. USPS has proposed withdrawing from the Federal 

Employees Health Benefits Program (FEHBP) and administering its own 

health care plan for its employees and retirees. This report looks at retiree 

health benefit funding options assuming that USPS continues to 

participate in FEHBP under current provisions. We will be issuing a 

separate report on USPS’s proposal to administer its own health care 

plan.

OPM’s projections also reflect the projected changes over time in the U.S. 

Treasury’s share of USPS’s retiree health benefit costs. U.S. Treasury is 

responsible for the portion of USPS’s share of retiree health benefit 

premiums attributable to service prior to 1971, when the Post Office 

Department was transformed into the USPS. The U.S. Treasury’s share 

of costs is diminishing over time as the proportion of retirees who had 

pre-1971 service decreases.

One of the factors affecting future changes in USPS’s liability for retiree 

health benefits is the size of its future workforce. The liability grows with 

future accruals of employee service and is also affected by when 

employees retire. USPS provided us with projected counts of career 

employees from 2011 through 2020. USPS noted that its intermediateterm planning horizon was through 2016 and that because of the rapidly 

changing nature of the mailing environment and the overall economy, 

projections beyond that point are likely to have a higher margin of error.

USPS’s projection had its career-employee complement dropping, from 

561,000 in 2011 and 534,000 in 2012 (representing approximate 

averages over the fiscal year) to approximately 416,000 by 2016 and to 

392,000 by 2020. USPS told us that it would be reasonable to assume 
Appendix I: Objectives, Scope, and 

Methodology

Page 58 GAO-13-112 U.S. Postal Service

that the complement would stabilize at that level thereafter. We assumed 

a constant career workforce of 392,000 for the remainder of the projection 

from 2020 through 2040.

USPS viewed this workforce projection as its optimal, target workforce 

path, assuming USPS would be able to achieve certain objectives 

regarding its network and other operational issues. It noted that its ability 

to achieve these reductions remains to be determined, and would be 

affected by negotiations with unions and any congressional actions.

USPS also noted that its workforce projections were based on long-term 

projections of mail volume. There is, of course, uncertainty regarding 

future levels of mail volume.

OPM found that using its standard valuation assumptions for such factors 

as employee retention and retirement, and adding in an amount of new 

hires necessary to stay on target, its projection model reasonably 

approximated USPS’s projected workforce path. Based on this workforce 

path and the number of projected retirements and other workforce 

reductions, OPM projected some new hiring to begin in 2014, and to 

continue as necessary to keep the workforce constant after 2020. OPM 

based new hire demographic profiles on the government-wide distribution 

of recent hires, since USPS has not been hiring enough recently to have 

adequate data for that purpose.

So that we could also calculate USPS payments and unfunded liabilities 

as a percentage of employee compensation, USPS provided us with 

projections of compensation (salary and wages and benefits) to 

accompany the workforce projections, through 2020. The data provided 

by USPS encompassed salary plus a portion of employee benefits; it did 

not include retiree health benefits, worker’s compensation, or any 

forecasted contract negotiations savings. For simplicity, we refer to these 

amounts as “compensation.” 

We projected these compensation amounts beyond 2020 to 2040. Since 

we assumed the USPS workforce to be constant over that period, we 

projected total compensation to increase by inflation plus one percent.

USPS had provided us with two sets of compensation projections through 

2020: one based on USPS’s own internal inflation assumption ranging 

from 1.7 to 2.2 percent annually over that period; and a second, at our 

request, assuming 3.0 percent inflation. We estimated an additional 

compensation projection based on 2.4 percent inflation from these data.

We used the two sets of compensation projections—one based on 2.4 

percent inflation and one based on 3.0 percent inflation—for our 
Appendix I: Objectives, Scope, and 

Methodology

Page 59 GAO-13-112 U.S. Postal Service

projections under the current law assumption basis and the Senate bill 

assumption basis, respectively.

Liabilities and normal costs are based on the “Aggregate Entry Age 

Normal” actuarial cost method. A per-participant normal cost rate is 

determined based on an aggregate ratio of present value of future 

benefits at entry age to present value of future service at entry age, with 

service weighted to increase with medical inflation and with the accrual 

period from entry age to assumed retirement. The normal cost rate is 

computed based on the demographics and claims’ costs of the entire 

FEHBP population, not just the USPS population, to reflect how the plan 

actually works. OPM would need additional USPS-specific data to 

determine a USPS-specific normal cost. The accrued liability is equal to 

the present value of future benefits (PVB) minus the present value of 

future normal costs. The PVB is just for the USPS population, but based 

on demographic assumptions for the entire FEHBP population, and 

without USPS-specific utilization, as this is how FEHBP premiums are 

determined. The actuarial cost method is the same one used by OPM in 

its financial reporting of the cost of these benefits (as required under 

FASAB accounting standards) and the same one used by OPM for 

determining funding requirements for the CSRS and FERS federal 

employee pension programs. Other actuarial cost methods could 

reasonably be adopted1

As discussed in the body of the report, OPM provided current and 

projected liabilities, normal costs, and premium payments on two different 

assumption bases: (1) the current law basis, which ties funding 

assumptions to those used by OPM for its financial reporting, which in 

turn is guided by the FASAB accounting standards and (2) the Senate bill 

basis, which ties funding assumptions to those assumptions used by 

OPM to determine USPS’s funding requirements for CSRS and FERS.

The assumptions differ with respect to discount rate, general inflation, and 

medical inflation (trend). These assumptions are disclosed in table 5 in 

for determining USPS prefunding requirements, 

such as the projected unit credit method (which is also the method used 

for single employer accounting under FASB). The actuarial cost method 

determines the portion of future retiree costs that are attributable to each 

year of employee service, and different methods build up the accrued 

liability more or less quickly over the working years.

 

1

If authorized by statute.
Appendix I: Objectives, Scope, and 

Methodology

Page 60 GAO-13-112 U.S. Postal Service

the report. Demographic assumptions that are common to both the 

current law and Senate bill assumption bases can be found in OPM’s 

most recent funding valuation report for CSRS and FERS,2

The discount rate of 4.90 percent used for the current law assumption 

basis, which is the discount rate used by OPM in its reporting at 

September 30, 2011, represents the single rate equivalent to a 10-year 

average of Treasury yield curves, with yield curve maturities matched to 

the timing of projected payments, a methodology that satisfies SFFAS 33.

We assumed that the discount rate would remain at 4.90 percent in future 

years. In fact, in each future year, a new 10-year average discount rate 

will be developed, and if interest rates were to remain unchanged from 

present levels, this would result in a lower future discount rate, as higher 

interest rates at the beginning of the 10-year averaging period are 

replaced by lower interest rates at the end of the averaging period. OPM 

indicated that modeling such changes would present significant 

computational difficulties.

though these 

are applied on a per-participant basis in the retiree health valuation and 

on a dollar-amount basis in the pension valuations. OPM also assumes 

that present retiree participation rates in FEHBP, calculated by age and 

gender, continue into the future.

3

 

2

OPM, Civil Service Retirement and Disability Fund Annual Report, Fiscal Year Ended 

September 30, 2011 (issued January 2012). This report is available on request from OPM.

Accordingly, we used a steady 4.90 percent 

discount rate, which implies that interest rates would rise from current low 

levels. In making this assumption, we noted that a steady 4.90 percent 

discount rate is still significantly lower than the 5.75 percent discount rate 

assumed for the Senate bill assumption basis, and so still provides useful 

information regarding potential effects of variations in assumptions. We 

also note that the medical inflation assumption used in the projection was 

developed to be consistent with the discount rate and general inflation 

assumption (the latter is also based on a 10-year average), and that 

OPM’s model would produce a lower medical trend assumption if 

discount rates and inflation assumptions were to decrease, offsetting 

much of the effect of the lower discount rate. Also, in projecting future 

premium payments, which went into projecting future liabilities, OPM did 

not “restart” the trend assumption vector each year.

3

OPM does not normally project future liabilities. It needs to calculate current liabilities for 

future payments each year, but fulfilling its mission does not require any calculation of 

future liabilities. As such, OPM did not have previously developed software to do such 

projections, and had to do special programming specifically for this request.
Appendix I: Objectives, Scope, and 

Methodology

Page 61 GAO-13-112 U.S. Postal Service

A final methodological decision that had to be made was whether the 

projection assumptions should differ from the valuation assumptions. In 

actuarial projections, there is a distinction between “valuation 

assumptions” and “projection (or experience) assumptions.” Valuation 

assumptions are those used to compute the liability and normal cost at 

any point in time. Projection assumptions model what actually happens as 

you move the projection forward, which might differ from the expectations 

embedded in the valuation assumptions. The Senate Bill specifies a 

different assumption basis than current law, the House Bill, or the 

Administration’s Approach, but these specifications are referring to 

valuation assumptions. While different valuation assumptions might be 

used, only one scenario can actually unfold in the real world. One way to 

reflect this situation in a projection would be to retain the different 

valuation assumptions for the different prefunding approaches, but then to 

project all the approaches under a uniform set of projection assumptions.

However, this approach would create false precision, because at some 

point the valuation assumptions would change to reflect emerging 

experience, and the projection would then need to incorporate additional 

assumptions as to when that would happen. Accordingly, as a reasonable 

approach to compare the four prefunding approaches on an apples-toapples basis, we modeled them under uniform assumptions—first using 

the current law assumption basis, with results presented in the main body 

of the report, and then using the Senate bill assumption basis, with results 

presented in appendix II of this report. As discussed further in the section 

of the report on “Sensitivity to Assumptions,” it turns out that these two 

assumption bases do not produce significant differences in basic findings 

because of the offsetting effects of different discount rates and medical 

inflation assumptions.

We conducted this performance audit from May 2012 through December 

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Appendix II: Projected Results Using Senate 

Bill Assumption Basis

Page 62 GAO-13-112 U.S. Postal Service

As discussed in the report, we projected USPS’s annual payments and 

unfunded liability under four prefunding approaches (Modified Current 

Law, Modified House, Modified Administration, and Modified Senate) and 

under two different assumption bases: the assumption basis specified in 

current law, and the assumption basis specified in the Senate bill. The 

differences between these two assumption bases are described in the 

report. The report presents projection results based on the current law 

assumption basis. This appendix presents the corresponding results 

based on the Senate bill assumption basis. As discussed in the report, 

our findings and conclusions are not materially different under the two 

different assumption bases.

Table 7: Estimated Annual Payments and Unfunded Liabilities in the Short Term (Fiscal Years 2013 to 2020) under Senate Bill 

Assumption Basis 

Dollars in billions

Fiscal year

Modified Current Law 

Approach

Modified House 

Approach

Modified Administration 

Approach

Modified Senate 

Approach

Annual 

Payments 

Unfunded 

Liability (at 

Year-end)

Annual 

Payments 

Unfunded 

Liability(at 

Year-end)

Annual 

Payments 

Unfunded 

liability (at 

Year-end)

Annual 

payments

Unfunded 

liability (at 

Year-end)

2013 8.6 44.9 8.6 44.9 1.3 52.3 4.3 49.3

2014 8.9 42.0 8.9 42.0 5.4 53.4 4.3 51.4

2015 9.2 38.5 11.5 36.3 5.6 54.4 4.4 53.4

2016 9.7 34.5 11.9 29.8 5.8 55.2 4.6 55.3

2017 4.9 35.0 4.6 30.4 6.3 55.6 4.8 57.2

2018 5.1 35.5 4.8 30.9 6.5 55.9 5.0 59.0

2019 5.3 35.8 5.0 31.2 6.7 56.1 5.2 60.7

2020 5.6 35.9 5.3 31.5 6.9 56.1 5.5 62.4

Total 

Payments $57.3 NA $60.7 NA $44.4 NA $38.2 NA

Average 

Annual 

Payment $7.2 NA $7.6 NA $5.5 NA 4.8 NA

Source: GAO. 

Notes: Totals may not add because of rounding. 

Appendix II: Projected Results Using Senate 

Bill Assumption Basis

Short-term Effects under 

Senate Bill Assumption 

Basis
Appendix II: Projected Results Using Senate 

Bill Assumption Basis

Page 63 GAO-13-112 U.S. Postal Service

Annual payments consist of any prefunding payments to the PSRHBF, and, where applicable, 

USPS’s share of premium payments for existing retirees and beneficiaries (see descriptions of the 

different approaches). Unfunded liabilities are the amounts as of the end of the fiscal year, and start 

at an estimated value of $47.3 billion as of September 30, 2012, under all four approaches.

Subsequent to the development of these projections, USPS reported the actual unfunded liability as 

of September 30, 2012, to be $47.9 billion.

Figure 10: Estimated Annual Payments for Different Approaches from Fiscal Year 2013 to Fiscal Year 2020 under Senate Bill 

Assumption Basis
Appendix II: Projected Results Using Senate 

Bill Assumption Basis

Page 64 GAO-13-112 U.S. Postal Service

Table 8: Annual Payment and Unfunded Liability in the Long Term (in Fiscal Year 2040, the Last Year of the Projection) under 

Senate Bill Assumption Basis 

Dollars in billions

Fiscal year

2040

Modified Current law 

Approach

Modified House 

Approach

Modified Administration

Approach

Modified Senate 

Approach

Annual 

Payment 

Unfunded 

Liability

Annual 

Payment

Unfunded 

Liability

Annual 

Payment

Unfunded 

Liability

Annual 

Payment

Unfunded 

Liability

Nominal $ $12.7 $10.4 $12.4 $7.3 $14.1 $24.1 $13.8 $79.4

Constant $ $5.6 $4.5 $5.4 $3.2 $6.2 $10.6 $6.0 $34.7

Percentage of 

Compensation 13 11 13 8 15 25 15 84

Funded 

percentage NA 96 NA 97 NA 92 NA 73

Source: GAO. 

Notes: Annual payment is prefunding payment to the PSRHBF. Unfunded liability is as of the end of 

the fiscal year. Constant dollar amounts were derived by converting the projected 2040 nominal dollar 

amounts into 2012 dollars, using an inflation assumption based on the Senate bill assumption basis. 

Compensation was projected by GAO based on information provided by USPS. Additional information 

on methodology and assumptions is presented in appendix I.

“Compensation” is used as a shorthand expression to represent employee salary and wage costs 

plus employee benefit costs exclusive of retiree health benefits, workers’ compensation, or any 

forecasted contract negotiations savings.

Long-term Effects under 

Senate Bill Assumption 

Basis
Appendix II: Projected Results Using Senate 

Bill Assumption Basis

Page 65 GAO-13-112 U.S. Postal Service

Figure 11: Estimated Annual Payments (as a Percentage of Compensation) for Different Approaches from Fiscal Year 2013 to 

Fiscal Year 2040 under Senate Bill Assumption Basis
Appendix II: Projected Results Using Senate 

Bill Assumption Basis

Page 66 GAO-13-112 U.S. Postal Service

Figure 12: Estimated Unfunded Liability (as a Percentage of USPS’s Annual Compensation Costs) for Different Approaches 

from Fiscal Year-end 2012 to Fiscal Year-end 2040 under Senate Bill Assumption Basis

Note: Under all four modified approaches to prefunding, the unfunded liability starts at the same point 

at September 30, 2012, and begins to diverge in fiscal year 2013 with the different approaches to 

prefunding. 
Appendix II: Projected Results Using Senate 

Bill Assumption Basis

Page 67 GAO-13-112 U.S. Postal Service

Figure 13: Estimated Funded Ratios for Different Approaches from Fiscal Year-end 2012 to Fiscal Year-end 2040 under Senate 

Bill Assumption Basis

Note: Under all four modified approaches to prefunding, the funded ratio starts at the same point at 

September 30, 2012, and begins to diverge in fiscal year 2013 with the different approaches to 

prefunding.
Appendix III: Comments from the U.S. Postal 

Service

Page 68 GAO-13-112 U.S. Postal Service

Appendix III: Comments from the U.S. Postal 

Service
Appendix IV: Comments from the U.S. Postal 

Service, Office of Inspector General

Page 69 GAO-13-112 U.S. Postal Service

Appendix IV: Comments from the U.S. Postal 

Service, Office of Inspector General
Appendix IV: Comments from the U.S. Postal 

Service, Office of Inspector General

Page 70 GAO-13-112 U.S. Postal Service
Appendix IV: Comments from the U.S. Postal 

Service, Office of Inspector General

Page 71 GAO-13-112 U.S. Postal Service
Appendix V: GAO Contact and Staff 

Acknowledgments

Page 72 GAO-13-112 U.S. Postal Service

Frank Todisco, (202) 512-2834 or todiscof@gao.gov

Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov

In addition to the individuals named above, Samer Abbas, Teresa 

Anderson, Beryl Davis, John Dicken, Kim Granger, Jacquelyn Hamilton, 

Hannah Laufe, Jennifer Leone, W. Stephen Lowrey, Kim McGatlin, 

Jonathan McMurray, Kristi Peterson, Steve Robblee, Amy Rosewarne, 

Aron Szapiro, and Crystal Wesco made key contributions to this report.

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contacts 

Staff 

Acknowledgments 

(544179)
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