U.S. POSTAL SERVICE

Action Needed to Address 

Unfunded Benefit Liabilities

Statement of Frank Todisco, Chief Actuary

Applied Research and Methods

Testimony 

Before the Subcommittee on Federal 

Workforce, U.S. Postal Service and the 

Census, Committee on Oversight and 

Government Reform, House of 

Representatives

For Release on Delivery 

Expected at 1:30 p.m. EDT

Thursday, March 13, 2014

GAO-14-398T

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-398T, a testimony 

before the Subcommittee on Federal 

Workforce, U.S. Postal Service and the 

Census, Committee on Oversight and 

Government Reform, House of 

Representatives 

March 13, 2014

U.S. POSTAL SERVICE

Action Needed to Address Unfunded Benefit 

Liabilities

Why GAO Did This Study

USPS continues to be in a serious 

financial crisis, with insufficient 

revenue to cover its expenses and 

financial obligations as the volume of 

USPS’s most profitable product, FirstClass Mail, continues to decline. At the 

end of fiscal year 2013, USPS had 

about $100 billion in unfunded 

liabilities: $85 billion in unfunded 

liabilities for benefits, including retireehealth, pension, and workers’ 

compensation liabilities, and $15 billion 

in outstanding debt to the U.S. 

Treasury—the statutory limit. These 

unfunded liabilities are a large and 

growing financial burden, increasing 

from 83 percent of USPS revenues in 

fiscal year 2007 to 148 percent of 

revenues in fiscal year 2013. Unfunded 

benefit liabilities represent estimated 

future benefit payments to current and 

retired employees for which USPS has 

not set aside sufficient money to pay.

This testimony discusses (1) the extent 

to which USPS’s benefit liabilities are 

unfunded and (2) the potential impacts 

of USPS’s unfunded benefit liabilities 

absent action by Congress to address 

them and key policy issues for 

consideration. This testimony is based 

primarily on GAO’s work over the past 

4 years and updated USPS financial 

information for fiscal year 2013. 

GAO has previously reported that a

comprehensive package of legislative 

actions is needed so that USPS can 

achieve financial viability and assure 

adequate benefits funding for more 

than 1 million postal employees and 

retirees. GAO has also previously 

identified various approaches 

Congress could consider to restructure 

the funding of USPS retiree health 

benefits and pensions. 

What GAO Found

The extent to which the U.S. Postal Service (USPS) has funded its liabilities 

varies due to different statutory funding requirements specific to each benefit 

program and USPS’s financial means to make payments. For example, USPS

has been required to prefund its pension benefit liability over decades, and as 

shown in the table below, its pension liability is 94 percent funded. Prefunding 

USPS’s retiree health benefits began in 2007, and the liability is about half 

funded. In contrast, USPS funds its workers’ compensation benefits on a pay-asyou-go basis, and the entire liability is unfunded. The largest unfunded liabilities, 

in order of decreasing size, are $48 billion for retiree health, $19 billion for 

pensions, and $17 billion for workers’ compensation. The rules for calculating the 

amount that USPS must fund each year differ among the pension and retiree 

health programs, including variations in amortization periods, recognition of any 

surpluses, use of actuarially determined versus fixed payments, and actuarial 

assumptions.

Funding Levels for Liabilities in Selected USPS Benefit Programs at the End of Fiscal Year 

2013

(Dollars in Billions)

Pension Retiree health

Workers’ 

compensation

Liability $306.2 $95.6 $17.2

Fund balance 286.9 47.3 0

Percentage funded 94 49 0

Unfunded liability 19.3 48.3 17.2

Source: USPS. 

GAO has previously reported that without congressional action to address 

USPS’s benefit funding issues and better align its costs and revenues, USPS

faces continuing low liquidity levels, insufficient revenues to make annual 

prefunding payments, and increasing liabilities. Deferring funding could increase 

costs for future postal ratepayers and increase the possibility that USPS may not 

be able to pay for these costs. GAO has previously identified the following key 

considerations related to USPS’s funding of its benefits liabilities:

• Reasons for prefunding include fairly allocating costs between current and 

future ratepayers, protecting USPS’s future viability, providing greater benefit 

security to employees and retirees, and protecting potential third parties.

• Prefunding decisions involve trade-offs between USPS’s current financial 

condition and its long-term prospects. 

• Congress needs to modify USPS’s retiree health prefunding payments in a 

fiscally responsible manner, and USPS should prefund any unfunded retireehealth benefits liability to the maximum extent that its finances permit.

• Lowering the retiree health funding target from 100 to 80 percent would have 

the effect of carrying a permanent unfunded liability. 

• USPS liabilities are estimated using assumptions for the federal workforce as 

a whole, rather than USPS-specific assumptions. GAO supports the use of 

the most accurate actuarial assumptions available, and if USPS-specific 

assumptions are used, that they be recommended by an independent body. 

View GAO-14-398T. For more information, 

contact Frank Todisco at (202) 512-2834 or 

todiscof@gao.gov.
 

Page 1 GAO-14-398T 

Chairman Farenthold, Ranking Member Lynch, and Members of the 

Subcommittee:

We appreciate the opportunity to discuss the U.S. Postal Service’s 

(USPS) unfunded liabilities. USPS continues to be in a serious financial 

crisis, with insufficient revenue to cover its expenses and financial 

obligations, a continuing decline in profitable First-Class Mail volume, 

increasing unfunded benefit liabilities, and borrowing limitations due to 

having reached its $15 billion statutory debt limit. Attention to USPS’s 

unfunded benefit liabilities is important, as they represent scheduled 

future benefit payments to current and retired employees for which USPS 

has not set aside sufficient money to pay. This testimony focuses on 1) 

the extent to which USPS’s current benefit liabilities are unfunded, and 2) 

the potential impacts of USPS’s unfunded benefit liabilities absent action 

by Congress to address them as well as key policy issues for 

consideration.

This testimony is based primarily on reports and testimonies we issued in 

the past 4 years that examined USPS’s financial condition, including its 

liabilities.

1

 

1

GAO, U.S. Postal Service: Health and Pension Benefits Proposals Involve Trade-offs,

The reports and testimonies cited in this statement contain 

detailed information on the methods used to conduct our work. For this 

testimony, we also updated USPS financial information with results from 

fiscal year 2013, which ended September 30, 2013. The work upon which 

this testimony is based was conducted 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.

GAO-13-872T (Washington, D.C.: Sept. 26, 2013); U.S. Postal Service: Proposed Health 

Plan Could Improve Financial Condition, but Impact on Medicare and Other Issues Should 

be Weighed before Approval, GAO-13-658 (Washington, D.C.: July 18, 2013); U.S. Postal 

Service: Status, Financial Outlook, and Alternative Approaches to Fund Retiree Health 

Benefits, GAO-13-112 (Washington, D.C.: Dec. 4, 2012); Federal Employees’ 

Compensation Act: Analysis of Proposed Program Changes, GAO-13-108 (Washington, 

D.C.: Oct. 26, 2012). 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); U.S. Postal Service: Strategies and Options to Facilitate Progress 

toward Financial Viability, GAO-10-455 (Washington, D.C.: Apr. 12, 2010). 
 

Page 2 GAO-14-398T 

As table 1 shows, at the end of fiscal year 2013, USPS had about $100 

billion in unfunded liabilities for pension, retiree health, and workers’ 

compensation benefits as well as outstanding debt. These unfunded 

liabilities have increased by 62 percent since fiscal year 2007.

Table 1: Selected USPS Liabilities and Unfunded Retiree Health and Pension Benefit Liabilities, Fiscal Year End 2007 through 

2013

(Dollars in billions) 

Liabilities Unfunded retiree health and pension liabilities (surplus)

Fiscal Year

Outstanding 

debt 

Workers’ 

compensation Retiree health CSRS FERS a a Total

2007 $4.2 $7.7 $55.0 $3.1 $(8.4) $61.6 

2008 7.2 8.0 53.5 3.3 (8.8) 63.2 

2009 10.2 10.1 52.0 9.6 (6.8) 75.1 

2010 12.0 12.6 48.6 7.3 (6.9) 73.6 

2011 13.0 15.1 46.2 (1.7) (11.4) 61.2 

2012 15.0 17.6 47.8 18.7 (3.0) 96.1 

2013 15.0 17.2 48.3 19.8 (0.5) 99.8

Source: USPS.

a

Note: For financial reporting purposes, USPS’s debt and its workers’ compensation liabilities are 

reported as liabilities on USPS’s balance sheet. USPS’s unfunded liabilities for pension and retiree 

health benefit are “off-balance-sheet liabilities”; these amounts are disclosed in USPS’s financial 

statements but are not reported as liabilities on USPS’s balance sheet. USPS does report a liability 

on its balance sheet for the statutorily required prefunding payments into the Postal Service Retiree 

Health Benefits Fund that it did not make; this liability is equal to $16.7 billion for the missed 

payments due during the fiscal years 2011-2013.

The Civil Service Retirement System (CSRS) is the federal pension plan that covers most 

employees hired before 1984, and the Federal Employees Retirement System (FERS) covers most 

employees hired in 1984 or later.

Since fiscal year 2007, USPS has experienced significant financial 

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

significantly. 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 2010.2

 

2

GAO, High-Risk Series: Restructuring the U.S. Postal Service to Achieve Sustainable 

Financial Viability, 

Also, USPS did not make retiree health 

benefit prefunding payments totaling $16.7 billion due during fiscal years 

GAO-09-937SP (Washington, D.C.: July 28, 2009). 

Background
 

Page 3 GAO-14-398T 

2011 through 2013.3 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.4

USPS’s dire financial condition makes paying for these liabilities highly 

challenging. In the short term, USPS lacks liquidity to fund needed capital 

investments and cannot increase its liquidity through borrowing since 

USPS has hit its $15 billion statutory debt limit. At the end of fiscal year 

2013, USPS held unrestricted cash of $2.3 billion, which it states 

represents approximately 9 days of average daily expenses. This level of 

liquidity could be insufficient to support operations in the event of another 

significant downturn in mail volume. In the long term, USPS will be 

challenged to pay for its unfunded liabilities on a smaller base of FirstClass Mail, its most profitable product. First-Class Mail volume has 

declined 37 percent since it peaked in fiscal year 2001. In addition, 

USPS’s five-year business plan projects this volume will continue 

declining by about 5 to 6 percent annually.

As shown in figure 1, USPS’s debt 

and unfunded liabilities have become a large and growing burden—

increasing from 83 percent of USPS’s revenues in fiscal year 2007 to 148 

percent of revenues in fiscal year 2013.

 

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

payment was delayed until August 1, 2012. Pub. L. No. 112-74, § 632 (Dec. 23, 2011).

USPS missed that payment, as well as the $5.6 billion that was due by September 30, 

2012 and the $5.6 billion that was due by September 30, 2013.

4

39 U.S.C. § 2005(a)(2). 
 

Page 4 GAO-14-398T 

Figure 1: Selected USPS Liabilities and Unfunded Pension and Health Benefit 

Liabilities as a Percentage of USPS Revenues

The extent to which USPS has funded its benefit liabilities varies as a 

result of different statutory funding requirements specific to each benefit 

program as well as USPS’s financial means to make funding payments.

For example, prefunding of USPS’s pension benefits has been required 

over decades, and as a result, USPS’s pension liability is over 90 percent 

funded. Prefunding USPS’s retiree health benefits began in 2007, and at 

a fairly aggressive pace, and the liability is about half funded at present. 

In contrast, under the Federal Employees Compensation Act (FECA),5

 

5

FECA, as amended, provides federal employees injured in the performance of duty with 

workers’ compensation benefits. 5 U.S.C. § 8101, et. seq.

USPS funds its workers’ compensation benefits on a pay-as-you-go 

basis, pursuant to statutory requirements, so the entire FECA liability is 

unfunded. Also, as discussed further below, the ongoing prefunding 

requirements—i.e., the rules for calculating the amount that USPS must 

pay each year—differ among the pension, retiree health, and workers’ 

compensation programs.

USPS’s Funding of Its 

Benefit Liabilities 

Varies by Program
 

Page 5 GAO-14-398T 

For each of the four post-employment benefit programs—Civil Service 

Retirement System (CSRS), Federal Employees Retirement System 

(FERS), retiree health, and workers’ compensation—table 2 illustrates, as 

of the end of fiscal year 2013, USPS’s liability, the value of the assets that 

have been set aside, the funded percentage, and the unfunded liability.

The funded percentages are 91 percent for CSRS, 101 percent (i.e., a 

slight surplus) for FERS, 49 percent for retiree health, and 0 percent for 

workers’ compensation. The unfunded liabilities, in order of decreasing 

size, are $48 billion for retiree health, $19 billion for pensions, and $17 

billion for workers’ compensation. These total to about $85 billion, which, 

together with USPS’s debt to the Treasury of $15 billion, adds to the $100 

billion of total debt and unfunded liabilities cited earlier.

Table 2: Selected USPS Benefit Liabilities at the End of Fiscal Year 2013 (Dollars in 

Billions)

Pension

CSRS FERS

Pension 

total 

Retiree 

health

Workers’ 

compensation

Liability $208.8 $97.4 $306.2 $95.6 $17.2

Assets 189.0 97.9 286.9 47.3 0.0

Percentage 

funded 91 101 94 49 0 

Unfunded liability 

(Surplus) 19.8 (0.5) 19.3 48.3 17.2

Source: USPS.

USPS’s benefit liabilities are actuarial estimates of the present value of a 

portion of the future benefits projected to be paid under each program 

based on formulas in current law. Specifically, for both the pension and 

retiree health programs, the liability includes two pieces: (1) the present 

value of all projected future benefits for current retirees and their 

beneficiaries, plus (2) the present value of a portion of the projected 

future benefits for current employees and their beneficiaries, based on 

employees’ service to date (with each additional year of service adding to 

the liability, such that approximately the full liability is accrued when 

What USPS’s Liabilities 

Represent
 

Page 6 GAO-14-398T 

employees reach retirement).6

These liability measurements depend on a combination of economic and 

demographic assumptions regarding such factors as future investment 

returns, interest rates, inflation, salary increases, medical costs, and 

longevity. These liability measurements inherently contain significant 

degrees of uncertainty, and can change from year to year, both because 

of actual experience differing from the assumptions and because of 

changes to the assumptions themselves, which can occur in response to 

emerging experience and changing conditions. As an example of the 

sensitivity of these liabilities to changes in assumptions, USPS has 

estimated that its $48 billion unfunded liability for retiree health benefits 

could have ranged from $35 billion to $64 billion, solely by varying the 

inflation rate by 1 percent in either direction.

Contrary to statements made by some 

employee groups and other stakeholders, these liabilities do not include 

any amounts for future USPS employees not yet hired or born. The 

workers’ compensation liability represents the present value of all 

projected future benefits for former employees who have sustained an 

injury and are eligible for benefits; it does not include a provision for 

projected future injuries to current employees.

USPS’s pension and retiree health liabilities are estimated using 

demographic and pay-increase assumptions developed for the federal 

workforce as a whole, rather than assumptions developed for the USPS 

workforce in particular. Some have suggested that USPS’s benefit 

liabilities may be overstated in that the use of USPS-specific assumptions 

would result in a lower liability measurement.7

 

6

For the pension programs, the liability also includes the present value of projected future 

benefits for former employees who met the plan’s vesting requirements but who have not 

yet retired and started receiving benefits. For the retiree health program, benefit payments 

take the form of USPS’s payment of its share of retiree health premiums.

In 2013, we testified that 

we support using the most accurate numbers possible. We suggested 

that if USPS-specific assumptions are used, the assumptions should 

7

 USPS’s Office of Inspector General (OIG) has estimated, based on an analysis of the 

liabilities as of the end of fiscal year 2012, that the use of USPS-specific assumptions 

would have reduced its FERS liability by $9.5 billion, reduced its CSRS liability by $1.3 

billion, and increased its retiree health liability by $2.3 billion, for an overall net total liability 

reduction of $8.5 billion. We have not analyzed USPS OIG’s assumption selection or 

estimates. Also, we have not researched USPS’s workers’ compensation liability to 

assess whether there is a similar question with regard to the assumptions underlying that 

estimate. 
 

Page 7 GAO-14-398T 

continue to be recommended by an independent body (such as OPM’s 

Board of Actuaries).8

USPS’s ongoing prefunding contributions are governed by separate rules 

applying to the funding of its CSRS, FERS, retiree health benefit, and 

workers’ compensation liabilities. These separate rules include variations 

in amortization periods, recognition of any surpluses, use of actuarially 

determined versus fixed payments, and actuarial assumptions.

The Postal Accountability and Enhancement Act (PAEA)9 eliminated 

USPS’s agency contributions for CSRS, as the USPS had a CSRS 

surplus at that time. The surplus of $17 billion was transferred to the new 

Postal Service Health Benefits Fund (PSHRBF) to begin prefunding 

USPS’s retiree health liability.10

For FERS, USPS is annually required to contribute its share of the 

“normal cost” plus an amortization payment toward any existing unfunded 

liability. The normal cost is the annual expected growth in the liability 

attributable to an additional year of employees’ service. The amortization 

Under current law, USPS is not required 

to make any prefunding contributions for CSRS prior to fiscal year 2017. If 

USPS were to have an unfunded CSRS liability in 2017 (for example, if 

the current unfunded CSRS liability of $20 billion persists), USPS would 

have to begin making prefunding payments to eliminate the unfunded 

liability by September 30, 2043, i.e., over a 27-year amortization period 

from fiscal years 2017 to 2043. If USPS were to have a CSRS surplus as 

of the close of any of the fiscal years ending in 2015, 2025, 2035, and 

2039, the CSRS surplus would be transferred to the PSHRBF.

 

8

We have also reported on a difference in the assumptions used in calculating the pension 

and retiree health liabilities. 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 its independent Board of Actuaries. In contrast, key 

economic assumptions for determining USPS’s liability for retiree health benefits are 

based on 10-year historical averages rather than a current long-term economic outlook.

This divergence developed because of changes to federal accounting standards 

promulgated subsequent to the enactment of the Postal Accountability and Enhancement 

Act. GAO-13-872T. 

9

Pub. L. No. 109-435,§ 102 (Dec. 20, 2006).

10An additional $3 billion of savings, accrued due to changes in the estimates of USPS’s 

funding obligations for CSRS, had been placed in escrow and was also transferred to the 

PSRHBF. 

Different Funding Rules 

Apply to Different 

Programs

CSRS

FERS
 

Page 8 GAO-14-398T 

payment toward any unfunded liability is determined using a 30-year 

amortization period. Since USPS has had a FERS surplus for a number 

of years, it has not had to make any amortization payments, only its 

normal cost payments.11

Unlike its pension liability, prior to 2007 USPS had been funding its retiree 

health 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 

employees. We have drawn attention to USPS’s retiree health benefit 

liability over the past decade. 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 being 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.

Current law does not provide any provision for 

utilization of any FERS surplus, as discussed further in the next section.

USPS made FERS normal cost payments of $3.5 billion in fiscal year 

2013.

12

In 2006, PAEA established requirements for USPS to begin prefunding its 

retiree health benefits. USPS stated in its 2007 Annual Report that such 

prefunding was a “farsighted and responsible action that placed the 

Postal Service in the vanguard of both the public and private sectors in 

providing future security for its employees, and augured well for our long-

 

11Near the end of fiscal year 2011, USPS temporarily halted its regular FERS 

contributions that are supposed to cover the cost of benefits being earned by current 

employees in order to maintain its liquidity. However, USPS has since made up those 

missed FERS payments. 

12GAO, U.S. Postal Service: Key Postal Transformational Issues, GAO-03-812T 

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

Retiree Health
 

Page 9 GAO-14-398T 

term financial stability,” but also acknowledged that the required 

payments would be a considerable financial challenge in the near term.13

PAEA required USPS to make “fixed” prefunding payments to the 

PSRHBF, ranging from $5.4 billion to $5.8 billion per year, due each fiscal 

year from 2007 through 2016.14 However, USPS has not made the last 

three required annual payments.15

Beginning in fiscal year 2017, USPS’s retiree health prefunding 

requirement switches to an actuarial approach. Each year USPS will be 

required to make an actuarially determined prefunding payment to the 

PSRHBF, and USPS’s share of premiums for then-current retirees and 

beneficiaries will be paid out of the PSRHBF rather than directly by 

USPS. The required prefunding payment will be equal to the normal cost, 

plus an amount to amortize any unfunded liability (or minus an amount to 

amortize any surplus). The amortization period is to fiscal year 2056 or, if 

later, 15 years from the then current fiscal year. As a result, the retiree 

health benefit prefunding required under PAEA occurs over a period of 50 

years or more, from fiscal years 2007 through 2056 and later—not over a 

We have referred to these 10 years of 

required payments as “fixed” because the amounts are specified in 

statute rather than calculated based on an actuarial measurement of the 

liability. In addition to these prefunding requirements, USPS is also 

required to continue paying its share of health benefit premiums for 

current retirees and their beneficiaries, payments USPS has been 

making. USPS paid $2.9 billion for its share of retiree health benefit 

premiums in fiscal year 2013.

 

13USPS, United States Postal Service Annual Report 2007, (Washington, D.C.: Nov. 15, 

2007). 

14USPS’s $5.4 billion retiree health benefit prefunding payment due at the end of fiscal 

year 2009 was reduced to $1.4 billion. Pub. L. No. 111-68, § 164 (Oct. 1, 2009). We 

reported on USPS’s retiree health prefunding requirements in GAO-13-112. 

15Originally due at the end of fiscal year 2011, USPS’s $5.5 billion retiree health payment 

was delayed until August 1, 2012. Pub. L. No. 112-74, § 632 (Dec. 23, 2011). USPS 

missed that payment, as well as the $5.6 billion that was due by September 30, 2012, and 

the $5.6 billion that was due by September 30, 2013.
 

Page 10 GAO-14-398T 

period of just 10 years, as has sometimes been stated.16 However, we 

have reported that the required payments are significantly “frontloaded,” 

in that the total payments required in the first 10 years (fiscal years 2007–

2016) were significantly in excess of estimates of what actuarially 

determined amounts would be.17

The Federal Employees’ Compensation Act (FECA) is the workers’ 

compensation program for federal employees, including USPS. FECA is 

managed by the Department of Labor (DOL) and provides benefits paid 

out of the Employees’ Compensation Fund to federal employees who 

sustained injuries or illnesses while performing federal duties. USPS 

funds its workers’ compensation under a pay-as-you go system by 

annually reimbursing DOL for all workers’ compensation benefits paid to 

or on behalf of postal employees in the previous year. USPS reimbursed 

DOL $1.4 billion for fiscal year 2013.

Without congressional action to address USPS’s benefit funding issues 

and better align its costs and revenues, USPS faces continuing low 

liquidity levels, insufficient revenues to make annual prefunding 

payments, and increasing benefit liabilities. Deferring funding could 

increase costs for future ratepayers and increase the possibility that 

USPS may not be able to pay for these costs. USPS stated that in the 

short term, should circumstances leave the agency with insufficient cash, 

it would be required to implement contingency plans to ensure that mail 

delivery continues. These measures could require that USPS prioritize 

payments to employees and suppliers ahead of some payments to the 

federal government. For example, as discussed previously, near the end 

 

16We have reported that, 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. The references to “75 years of benefit payments” may 

represent a shorthand description of the benefits being prefunded. As noted earlier in this 

testimony where we described the composition of USPS’s retiree health liability, the 

prefunding target actually covers (1) all projected future benefits for current retirees and 

their beneficiaries, plus (2) a portion of projected future benefits for current employees and 

their beneficiaries, such portion accruing over the employees’ careers. This prefunding 

target would include some benefits projected to be paid beyond 75 years—because, for 

example, some current employees can be expected to live beyond 75 more years—but it 

would also exclude some benefits projected to be paid within the next 75 years—because 

it only includes a portion of the benefits that are expected to ultimately be paid for current 

employees. 

17GAO-13-112. 

Workers’ Compensation

Impact of Unfunded 

Benefit Liabilities 

Absent Actions by 

Congress to Address 

Them and Key 

Considerations
 

Page 11 GAO-14-398T 

of fiscal year 2011, in order to maintain its liquidity USPS temporarily 

halted its regular FERS contribution. However, USPS has since made up 

those missed FERS payments. According to USPS, current projections 

indicate that it will be unable to make the required $5.7 billion retiree 

health benefit prefunding payment due in September 2014. USPS has 

stated that its cash position will worsen in October 2014 when it is 

required to make an estimated payment of $1.4 billion to DOL for its 

annual workers’ compensation reimbursement. USPS’s statements about 

its liquidity raise the issue of whether USPS will need additional financial 

help to remain operational while it restructures and, more fundamentally, 

whether it can remain financially self-sustainable in the long term.

We have previously reported that Congress and USPS need to reach 

agreement on a comprehensive package of actions to improve USPS’s 

financial viability.18 In previous reports, we have discussed a range of 

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.19 We have also reported that it is 

important for USPS to align its expenses and revenues to avoid even 

greater financial losses, repay its outstanding debt, and increase capital 

for investments needed to sustain its national network.20 In addition, we 

have reported that Congress needs to modify USPS’s retiree health 

prefunding payment in a fiscally responsible manner, and that USPS 

should prefund any unfunded retiree health liability to the maximum 

extent that its finances permit.21 Implementing strategies and options to 

better align costs with revenues would better enable USPS to be in a 

financial position to fund and pay for its debt and unfunded benefit 

liabilities.

With any unfunded liability comes the risk of being unable to pay for it in 

the future. This risk can be heightened when future revenues are 

declining or highly uncertain, as is the case for USPS. We have reported 

 

18GAO-10-455. 

19GAO-10-455. 

20GAO-13-347T. 

21GAO-13-112. 

Key Funding 

Considerations
 

Page 12 GAO-14-398T 

on several rationales for prefunding pension and retiree health benefits.22

• Achieving an equitable allocation of cost over time by paying for 

retirement benefits during employees’ working years, when such 

benefits are earned. For USPS, this is about equity between current 

and future postal ratepayers. This is in line with helping USPS align 

costs with revenues. An additional consideration here is the “legacy” 

unfunded liability that was not paid by ratepayers in prior years.

Some of the same reasoning could be applied to workers’ compensation 

benefits as well. The benefits of prefunding include the following:

• Protecting the future viability of the enterprise by not saddling it 

with bills later after employees have retired.

• Providing greater benefit security to employees, retirees, and 

their beneficiaries. Prefunded benefits are more secure against the 

future risks of benefit cuts or inability to pay.

• Providing security to any third party that might become 

responsible in the event of the enterprise’s inability to pay for 

some or all of the unfunded liability.

Prefunding decisions also involve trade-offs between USPS’s current 

financial condition and its long-term prospects. While reducing unfunded 

liabilities protects the future viability of the organization, no prefunding 

approach will be viable unless USPS can make the required payments, 

but attempting to do so in the short term could further strain its finances.

USPS currently lacks liquidity and postal costs would need to decrease or 

postal revenues to increase, or both, to make required prefunding 

payments. To the extent prefunding payments are postponed, larger 

payments will be required later, when they likely would be supported by 

less First-Class Mail volume and revenue.

In 2012, we developed projections of USPS’s future levels of liability and 

unfunded liability for its retiree health benefits. These projections showed 

that current law would result in a significant reduction of USPS’s future 

 

22GAO-13-112. 
 

Page 13 GAO-14-398T 

unfunded liability if USPS resumed making the required payments.23

From the perspective of all USPS’s post-employment benefit programs, 

any relaxation of funding requirements in the short term—for example, by 

suspending retiree health prefunding for a period of years—will result in a 

higher overall unfunded liability for these programs in total. Nonetheless, 

Congress has to consider the balance between (1) providing USPS with 

liquidity that provides breathing room in the short term in order to 

restructure its operations for long-term success, and (2) protecting USPS, 

its employees and retirees, and other stakeholders in the long term by 

funding its liabilities for benefits that have already been earned or 

accrued.

However, USPS has indicated that it does not expect to make any of the 

remaining fixed prefunding payments, through fiscal year 2016, an 

intention that means its unfunded liability would increase and its future 

payments would be greater.

It is also important to note that unfunded liabilities can be reduced in 

either of two ways. An unfunded liability is the difference between the 

liability and its supporting assets. As such, an unfunded liability can be 

reduced by increasing the amount of assets (i.e., through prefunding), but 

it can also be reduced by decreasing the size of the liability, such as by 

decreasing benefit levels or USPS’s share of such benefit costs, where 

such a reduction is deemed to be feasible, fair, and appropriate. We have 

reported on proposals to increase the integration of USPS’s retiree health 

benefits with Medicare, which would have the effect of reducing USPS’s 

liability but would also involve other policy considerations.24

In our prior reports, we have identified funding issues related to USPS’s 

unfunded liabilities that remain unresolved and have identified potential 

methods for addressing these issues:

• Actuarial assumptions: We support making the most accurate 

measurements possible of USPS’s benefit liabilities, and support the 

development and use of assumptions specific to USPS’s population of 

 

23More specifically, we modeled a modified version of current law that assumed that 

USPS’s missed prefunding payments for fiscal years 2011 and 2012 would be waived and 

that USPS would resume making required payments in fiscal year 2013. USPS 

subsequently failed to make its $5.6 billion payment due by September 30, 2013.

24GAO-13-658. 
 

Page 14 GAO-14-398T 

plan participants.25 We have suggested that if USPS-specific 

assumptions are used, that the assumptions should continue to be 

recommended by an independent body, such as OPM’s Board of 

Actuaries.

• Fixed versus actuarially determined payments: We have reported that 

the retiree health prefunding schedule established under PAEA was 

significantly frontloaded, with total payment requirements through 

fiscal year 2016 that were significantly in excess of what actuarially 

determined amounts would be.26 We added that Congress needs to 

modify these payments in a fiscally responsible manner. We support 

proposals to replace the fixed payments with actuarially determined 

amounts.

• Funding targets: We have expressed concern about proposals to 

reduce the ultimate funding target for USPS’s retiree health liability 

from the current target of 100 percent down to 80 percent. Such a 

reduction would have the effect of carrying a permanent unfunded 

liability equal to roughly 20 percent of USPS’s liability, which could be 

a significant amount.27 If an 80 percent funding target were 

implemented because of concerns about USPS’s ability to achieve a 

100 percent target level within a particular time frame, an additional 

policy option to consider could include a schedule to achieve 100 

percent funding in a subsequent time period after the 80 percent level 

is achieved.

• FERS surplus: Under current law, USPS’s payments to FERS 

increase, appropriately, when USPS has an unfunded FERS liability, 

but USPS realizes no financial benefit when it has a FERS surplus.

We have reported that we would support a remedy to this asymmetric 

treatment, but we have reported on important trade-offs to consider 

 

25GAO-13-872T. 

26GAO-13-112. 

27For example, USPS’s retiree health benefit liability at the end of fiscal year 2013 was 

$95.6 billion. Twenty percent of that is $19.1 billion.
 

Page 15 GAO-14-398T 

for different types of remedies.28 While the most recent estimate 

shows a relatively small FERS surplus for USPS—an estimated $0.5 

billion—USPS has stated that it believes its FERS surplus would have 

been substantially larger if its FERS liability had been estimated using 

postal-specific demographic and pay increase assumptions.29 A 

conservative approach to permit USPS to access any FERS surplus 

would be to use it to reduce USPS’s annual FERS contribution by 

amortizing the surplus over 30 years (which would mirror the legally 

required treatment of an unfunded FERS liability). Another approach 

would be to reduce USPS’s annual FERS contribution by offsetting it 

against the full amount of surplus each year until the surplus is used 

up; this would be comparable to what occurs for private-sector 

pension plans. We have previously suggested that any return of the 

entire surplus all at once should be done with care, given the inherent 

uncertainty of the estimated liability and the existence of USPS’s other 

unfunded liabilities.30

In conclusion, we again emphasize that deferring funding liabilities in 

benefit programs could increase costs for future ratepayers and increase 

the possibility that USPS may not be able to pay for its benefit costs, and 

that USPS should work to reduce its unfunded liabilities to the maximum 

extent that its finances permit. Ultimately, however, the viability of funding 

promised benefits depends on the financial viability of USPS’s underlying 

business model. We continue to recommend that Congress adopt a 

comprehensive package of actions that will facilitate USPS’s ability to 

align costs with revenues based on changes in the workload and the use 

of mail.

A one-time-only return of the entire surplus 

should be considered as a one-time exigent action and only as part of 

a larger package of postal reforms and restructurings. Any provision 

that would return a surplus whenever one developed would likely 

eventually result in an unfunded liability.

 

28GAO, Responses to Questions for the Record; Committee on Homeland Security and 

Governmental Affairs, February 13, 2013, Hearing on “Solutions to the Crisis Facing the 

U.S. Postal Service” (Washington, D.C.: Apr. 5, 2013). GAO, Responses to Questions for 

the Record; Committee on Homeland Security and Governmental Affairs, September 26, 

2013, Hearing on “Outside the Box: Reforming and Renewing the Postal Service, Part II – 

Promoting a 21st Century Workforce” (Washington, D.C.: Nov. 21, 2013). 

29United States Postal Service, 2013 Report on Form 10-K (Washington, D.C.: Nov. 15, 

2013) 32.

30GAO-13-872T. 
 

Page 16 GAO-14-398T 

Chairman Farenthold, Ranking Member Lynch, and Members of the 

Subcommittee, this concludes my prepared statement. I would be 

pleased to answer any questions that you may have at this time.

For further information about this statement, please contact Frank 

Todisco, Chief Actuary, FSA, MAAA, EA, Applied Research and Methods, 

at (202) 512-2834 or todiscof@gao.gov. Mr. Todisco meets the 

qualification standards of the American Academy of Actuaries to render 

the actuarial opinions contained in this testimony. Contact points for our 

Congressional Relations and Public Affairs offices may be found on the 

last page of this statement. In addition to the contact named above, 

Lorelei St. James, Director, Physical Infrastructure Issues; Teresa 

Anderson; Samer Abbas; Lauren Fassler; Thanh Lu; and Crystal Wesco 

made important contributions to this statement.

GAO Contact and 

Key 

Acknowledgments

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