United States Postal Service: Information on Retirement Plans
Published: 2001-12-31T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: This report identifies long-term structural or operational issues that may affect the U. S. Postal Services's (USPS) ability to provide affordable universal postal service on a break-even basis. One key issue is the Service's retirement costs and future liabilities. USPS had a net loss of $199 million in fiscal year 2000 and recently announced a $1.7 billion net loss for fiscal year 2001. The impact of September 11 and the subsequent anthrax mailings on the volume and the cost of future mail service is unclear. USPS' annual retirement plan costs are projected to rise significantly in the next 10 years--from $8.5 billion in fiscal year 2000 to $14 billion in fiscal year 2010. USPS also faces mounting debt because of pay increases resulting from new labor contracts and annual cost-of-living adjustments for retirees. USPS reported an outstanding liability for future retirement benefits of $32.2 billion as of September 2000, and anticipates paying another $16.5 billion in interest on this liability over 30 years. The Post-Retirement Health Benefit Program--an additional benefit available to USPS retirees--cost $744 million in fiscal year 2000. When this benefit is added to the retirement plan, it raises total retirement costs for fiscal year 2000 to $9.3 billion. USPS projects that this additional post-retirement health benefit will cost $2 billion in fiscal year 2010, raising the Service's total retirement costs to $16 billion that year.

section_title: Letter
paragraphs: Your March 21, 2001, letter expressed concern about a number of issues  pertaining to the United States Postal Service’s (USPS) financial condition.   This report addresses one of the issues raised in your letter, namely,  identifying longer-term structural or operational issues that may affect the  Service’s ability to provide affordable universal postal service on a break- even basis.  One key operational issue involves the Service’s retirement  costs and future liabilities.  The Service’s financial outlook has deteriorated  significantly over the past few years.  The Service finished fiscal year 2000  with a $199 million net loss and recently announced a $1.7 billion net loss  for fiscal year 2001.  The Service also projects a net loss of $1.35 billion for  fiscal year 2002.  However, it is unknown what the impact of the events of  September 11, 2001 and the subsequent delivery of anthrax spores through  the U.S. mail will have on the volume and cost of future mail service.  Consequently, estimated losses, and other projections in this report, which  we and the Service’s independent auditors have not verified, may be  changed by USPS at a later date.
These current and projected losses are putting pressure on the Service’s  cash flows from operations and its debt situation.  One major expense the  Service incurs each year is for retirement benefits, and the Service  anticipates significant increases in its retirement benefit expenses in future  years.  As agreed with your offices, we are providing information about the  cost and funding requirements of the Service for federal retirement plans  and other retirement benefits, which were 14.7 percent of total operating  expenses in fiscal year 2000.
subsections: section_title: Background
paragraphs: The United States Postal Service commenced operations on July 1, 1971, in  accordance with the provisions of the Postal Reorganization Act of 1970  (P.L. 91-375). The Service is an independent establishment of the executive  branch with a goal to operate on a break-even basis and cover its expenses  almost entirely through postal revenues. The equity the U.S. government  held in the former Post Office Department became the initial capital of  USPS (approximately $3 billion), and the U.S. government remained  responsible for all the liabilities attributable to operations of the former  Post Office Department.  At inception, the Postal Service did not have any  unpaid liabilities to OPM for retirement benefits.  At that time, USPS  employees participated in the federal Civil Service Retirement System  (CSRS), which provided them the same benefits as other federal  employees, that is, their future retirement benefits would be paid by OPM  based on payroll deductions and USPS contributions under provisions of  law governing CSRS.
With over 900,000 employees at the end of fiscal year 2000, USPS has the  largest number of federal civilian employees, and Fortune magazine ranks  it as the second largest employer in the United States.  Similar to other  federal career employees, USPS career employees participate in one of  three federal retirement systems primarily administered by OPM:   the Civil Service Retirement System,   the Federal Employees Retirement System (FERS), and  the CSRS Offset Plan.
At the end of fiscal year 2000, nearly 786,000 USPS career employees, or 87  percent of the Service’s employees, were participating in one of the three  federal retirement programs.  The remaining 13 percent were casual labor  and transitional employees who do not participate in the federal retirement  plans.  Of the total career employees, 263,383 employees (33.5 percent)  participated in CSRS; 510,509 employees (65 percent) participated in FERS;  and 12,021 employees (1.5 percent) participated in the CSRS Offset Plan.
subsections: section_title: Plan 1 – Civil Service Retirement System
paragraphs: CSRS is administered by OPM, which maintains a Civil Service Retirement  and Disability Fund (CSRDF) for federal employees.  CSRS is a defined  benefit retirement plan, which provides a basic annuity to participants.   Benefit payments to federal retirees and their survivors participating in any  of the three retirement plans are made from CSRDF.  CSRS covers  employees hired prior to January 1, 1984.  Employees hired after  December 31, 1983, are not eligible for coverage in CSRS, but participate in  either FERS or the CSRS Offset Plan.  Contributions to the CSRS plan are  collected from the Service and its employees and deposited into OPM’s  CSRDF, according to the proportionate sharing arrangement established in  law.   Participating USPS employees contribute in the same proportion and  percentage amounts as most other civilian federal employees. USPS and its  employees also contribute to Medicare at the rate prescribed by law.
In addition to the contributions to CSRS discussed above, the Service is  responsible for making additional contributions to CSRDF to fund the  future retirement costs of increases to pay that the Service granted to  employees under terms in new labor contracts and the annual COLAs to  retirees, which were prescribed by law.  The provisions for the Service to  make these additional contributions to OPM were included in amendments  to the law governing CSRS and make the funding of USPS retirement plans  different from other federal agencies making annual contributions to the  federal CSRS retirement plan.  USPS makes these payments without any  additional contributions from employee pay.
section_title: Plan 2 - Federal Employees Retirement System
paragraphs: In the Social Security Amendments of 1983 (P.L. 98-21), Congress mandated  participation in Social Security by all civilian federal employees initially  hired after December 31, 1983.  Because Social Security provides both  retirement and disability benefits, and because enrolling federal workers in  both CSRS and Social Security would have resulted in employee  contributions of more than 13 percent of each worker’s salary, Congress  directed the development of a new federal employee retirement system  with Social Security as the cornerstone.  The result of these efforts was  FERS, created by P.L. 99-335, enacted on June 6, 1986.
All permanent federal employees, including USPS employees, whose initial  federal employment began after December 31, 1983, are covered by FERS,  as are employees who voluntarily switched from CSRS to FERS during  specified “open seasons.”  FERS consists of three elements: Social Security,  a FERS annuity (a defined benefit plan), and a Thrift Savings Plan (TSP) (a  defined contribution retirement savings and investment plan).
The Service and its employees also contribute to Social Security and  Medicare at the rates prescribed by law.
In addition, USPS is required to contribute to TSP a minimum of 1 percent  per year of basic pay for employees covered by FERS. The Service also  matches voluntary employee contributions up to 3 percent of an  employee’s basic pay, and 50 percent of a contribution from 3 to 5 percent  of basic pay.
section_title: Plan 3 – CSRS Offset Plan
paragraphs: In the legislation that created FERS, Congress also created the CSRS Offset  Plan. Typically, CSRS Offset retirement applies to employees who had  breaks in service that exceeded 1 year and ended after 1983 and had 5 years  of creditable civilian service as of January 1, 1987.  CSRS Offset retirement  coverage also applies to employees hired before January 1, 1984, who  acquired CSRS coverage for the first time after that date and had at least 5  years of creditable service by January 1, 1987.  Under this plan, each  employee and employer contribute an equal amount into Social Security, as  prescribed by law.  In retirement, these employees’ CSRS benefits are  reduced (offset) by a portion of their Social Security benefits.
Under the provisions of the CSRS Offset Plan, both USPS and the employee  contribute a percentage of the employee’s basic pay to the CSRS fund,  Social Security, and Medicare at the statutorily prescribed rates.
section_title: Scope and Methodology
paragraphs: To better understand the full nature and components of the Service’s  retirement plans, we (1) interviewed officials at the Service and OPM,  (2) reviewed and analyzed documents, including legislation, funding plans,  budget documents, financial statements, USPS projections, and fiscal  impact statements, and (3) analyzed the future projected costs of these  plans.  Our scope did not include identifying ways for the Service to  respond to the current legal framework for funding its retirement liabilities  to OPM for annual increases to CSRS basic pay and retiree COLAs.  We  conducted our work from May 2001 through October 2001 in accordance  with generally accepted government auditing standards.  We did not  independently verify underlying data.  We obtained oral comments from  USPS and written comments from OPM on a draft of this report.  OPM’s  written comments are reprinted in appendix IV.
section_title: Estimated Future Annual Costs for the Three Plans
paragraphs: The Service projects that the total annual retirement costs for the three  plans, including installment payments for its additional liability for  increases in pay and retiree COLAs under CSRS, will increase over the next  10 years from $8.5 billion in fiscal year 2000 to an estimated $14 billion in  fiscal year 2010.  The FERS portion of that total, including Social Security,  is estimated to more than double from $4.1 billion in fiscal year 2000 to  $9 billion in fiscal year 2010.  See figure 1 for the total of all the retirement  plans’ historical and projected annual costs, including the installment  payments made by USPS for its additional obligation to OPM for increases  in pay and retiree COLAs under CSRS.  See appendix I for the dollar  amounts of each plan’s cost, including payments for increases to CSRS  employees’ basic pay and retirees’ COLAs.
A discussion of the costs for each of the three individual plans follows.
section_title: Costs and Payments of the Three Individual Plans
paragraphs: The cost of the CSRS retirement plan for fiscal year 2000 was $800 million,  excluding the payments made toward the Service’s additional obligation to  OPM.  Although total pension costs for all three retirement plans are  expected to increase significantly, USPS estimates that the cost for the  standard, annual CSRS contributions will decrease in the future as current  employees participating in the plan begin to retire. (See figure 2.)
In addition to the standard, annual contributions to CSRS discussed above,  the Service is responsible for paying additional amounts to CSRDF to fund  the future costs of pay increases that USPS granted to its employees under  terms in new labor contracts and the annual COLAs to retirees, which were  prescribed by law.
The provisions for USPS to make these additional contributions to OPM  make the funding of the Service’s retirement plans for both pay increases  and COLAs different from other federal agencies making annual  contributions to the federal CSRS retirement plan.
As described in more detail in a later section of this report, USPS makes  annual installment payments to OPM toward its additional liability for  CSRS employees’ pay increases and retirees’ COLAs.  The total installment  payment for these liabilities in fiscal year 2000 was $3.6 billion, which  included $1.6 billion in interest charges and $2 billion in principal  payments.  The Service estimates that its annual payments for these  liabilities will continue to be significant, increasing steadily through fiscal  year 2010, then decreasing at some later point as the number of employees,  retirees, and survivors under CSRS decreases.  (See figure 3.)
The cost of FERS for fiscal year 2000 was $4.1 billion.  The Service  estimates that the annual cost of FERS will more than double to  approximately $9 billion by fiscal year 2010.  The large increase in FERS  costs is expected because new employees (those hired after January 1,  1984) are mostly only eligible to participate in FERS.  (See figure 4.)  As  employees in CSRS retire, they will be replaced by employees participating  in FERS. The employers’ standard, annual contributions toward FERS are  higher than CSRS because FERS contributions are calculated by OPM on a  stronger actuarial basis than CSRS contributions.  FERS contributions are  on a “dynamic” basis, which includes assumptions for future rates of  inflation, future salary increases, and a provision for an assumed  percentage rate of return on plan investments. Together, USPS  contributions and employee withholdings are intended to fully fund the  annual pension cost for employees covered under FERS over the  employees’ working careers with the Service.
subsections: section_title: CSRS Offset Plan
paragraphs: The cost of this plan for fiscal year 2000 was $35 million.  Although total  pension costs for USPS are expected to increase significantly, it estimates  that the standard, annual contributions to the CSRS Offset Plan will  decrease in the future as current employees participating in the plan begin  to retire. (See figure 5.)  The plan became effective during fiscal year 1986,  but it covered certain employees hired after 1983; consequently, amounts  paid in fiscal years 1986 and 1987 by the Service represent the retroactive  effect of those costs.
section_title: Funding Status of the Three Plans
paragraphs: The Service pays in full its standard, annual retirement payments to OPM  under provisions of the laws governing all federal employees participating  in CSRS, FERS, and the CSRS Offset Plan. In addition, the Service reported  in its fiscal year 2000 audited financial statements an outstanding liability  for future retirement benefits of $32.2 billion (excluding $16.5 billion of  future related interest charges over 30 years) due to obligations that made  the Service liable for pay increases that employees received under terms of  new labor contracts and for COLAs to retirees, who retired on or after  July 1, 1971, and their survivors, under the CSRS retirement plan.  COLAs  are based on the rate of inflation as measured by the Consumer Price Index  for Urban Wage Earners and Clerical Workers (CPI-W).  As prescribed by  law, all CSRS retirees and survivors receive yearly COLAs equal to the  annual percentage change in the CPI-W.
The Service’s total liability balance has generally been increasing each year,  even though it has been making annual installment payments toward this  retirement liability. (See figure 6.)
The increase is occurring because the annual additions to the Service’s  liability have generally been greater than the annual principal payments  made under the installment payment provisions set forth by law.  For  instance, the Service’s fiscal year 2000 additional liability was $2.7 billion,  while its required principal installment payment was $2 billion, plus  interest of $1.6 billion.  Figure 7 displays how the annual increases in the  liability have cumulatively increased more rapidly than the annual  accumulated principal payments.
section_title: Portion of Liability Due to Increases in Employee Pay
paragraphs: By law, whenever USPS increases a CSRS employee’s pay as a result of new  labor union contracts, it is liable to OPM for the present value of additional  future retirement benefits to be paid to the employee upon retirement as a  result of the pay increase. When an increase in pay is authorized, OPM  determines the Service’s present value of the retirement liability for the  future retirement benefits that will result from the pay increase. The  Service is required to pay for this incremental liability in 30 equal annual  installments, with interest computed at the rate used in the most recent  valuation of CSRS, with the first payment due at the end of the fiscal year in  which an increase in pay becomes effective.  The interest rate for  calculating the present value of the incremental liability and for  determining the amortization payments has been 5 percent for 29 years.
According to OPM’s Office of the Actuary, the law prescribes that the  calculation of the additional annual cost of retirement benefits due to  increases in basic pay be made on the “static” basis, which assumes no  future inflation and no future general schedule salary increases.  OPM’s  Board of Actuaries has recommended a 5-percent discount rate for the  purpose of the static valuation.  OPM does not make the calculations on a  “dynamic” basis, which would include an assumed annual rate of inflation,  future salary increases, and a provision for an assumed percentage rate of  return on plan investments.
For fiscal year 1972, the Service’s first fiscal year of operations, OPM  determined that the additional liability for basic pay increases was  approximately $1 billion.  Under the 30-year installment arrangement, the  Service paid $63 million toward that additional cost for fiscal year 1972,  leaving an unpaid liability balance of $954 million to be paid for future  years.  In each subsequent year, additional liabilities were accrued as a  result of pay increases in each of those years.  Because the liabilities being  added each year are also being paid off in 30-year installments, the overall  liability for unpaid pension costs has grown dramatically, even though the  Service has been making annual payments on the accumulating balance.
Figure 8 shows the growth in the liability balance attributable to increases  in CSRS employee pay.  For fiscal year 1972 through fiscal year 1981, the  liability balance grew from approximately $1 billion to $10.3 billion.  During  the next 10 fiscal years (1982 through 1991), the balance grew to  $21.8 billion (a 112-percent increase), and in the latest 9 fiscal years (1992  through 2000), it grew to $25.9 billion (a 19-percent increase).  As more of  the current CSRS employees eligible for basic pay increases retire, future  increases in the liability balance should level off and, eventually, the  balance due for pay increases should start to decrease.  However, this  decrease will likely be accompanied by an increase in the growth of retiree  COLA liabilities until the CSRS retiree group begins to diminish.
In the 29 years from fiscal years 1972 through 2000, the OPM assessments  for pay increases totaled $42.1 billion.  During that same period, the Service  paid $16.2 billion in principal payments toward that liability, plus interest of  $21.6 billion, for total payments to OPM of $37.8 billion.  As of  September 30, 2000, the Service owed $25.9 billion in principal, and its  annual principal payments have generally been less than the additional  liabilities assessed each year.  Because the Service is making principal  payments in amounts less than the new liability added each year, the  unpaid balance is growing, as is the interest charged annually on the unpaid  balance.  See appendix II for the annual liabilities added by OPM to the  Service’s balance for CSRS pay increases and the annual installment  payments made by the Service to OPM to reduce the liability balance.
section_title: Portion of Liability Attributable to Increases in Retiree COLAs
paragraphs: By law, the Service is also liable for its share of the COLAs granted to  retirees who retired after July 1, 1971, and their survivors.  As prescribed by  law, CSRS retirees and survivors receive yearly COLAs.  Each year, OPM  determines the estimated increase in the Service’s liability for the COLA  increase and establishes the amount of the installment payments to be  made over a 15-year period, plus interest at 5 percent per year.
Since fiscal year 1990, the Service has recorded a total liability of  $11.1 billion for retiree COLA increases.  Of that liability amount, the  Service has paid OPM $4.8 billion, plus interest of $2.3 billion for a total of  $7.1 billion.  Because the Service is only required to pays a portion of the  annual increase of this liability, its payments have generally been less than  the additional liabilities added each year, and the balance, as well as the  interest on the unpaid balance, continues to grow.  Even with projections of  low inflation, the Service expects the new annual liability amounts to be  larger than its annual payments on the liability because the retiree/survivor  population will increase.  Thus, the total liability for retiree COLAs is  expected to continue to grow over time until most of the CSRS annuitants  are deceased.
Figure 9 depicts the change in the liability amount.  Also, see appendix III  for the annual liabilities added by OPM to the Service’s liability balance for  COLA increases and the annual installment payments made by the Service  to OPM toward reducing the balance.
section_title: An Additional Retirement Benefit: The Post-Retirement Health Benefit Program
paragraphs: Although not part of a retirement plan, the Post-Retirement Health Benefit  Program is an additional benefit available to USPS retirees.  The post- retirement health benefit represents a significant cost, which is also  expected to increase in future years.  USPS estimates that the annual cost  of this benefit will increase from $744 million in fiscal year 2000 to about  $2 billion in fiscal year 2010.  In the Service’s Integrated Financial Plan for  Fiscal Year 2002, health care costs are projected to increase by 10 percent;  however, subsequent to that projection it was reported that the average  premiums for employees will rise an average 13 percent in fiscal year 2002.   These large, unexpected increases in health care costs make projections of  future costs very uncertain.
USPS is required to pay the employer’s share of health insurance premiums  incurred through participation in the Federal Employees Health Benefit  Program (FEHBP) for all employees who retired on or after July 1, 1971,  and their survivors. The annual cost for this program is included in the  Service’s Total Compensation and Benefits expense reported in its annual  financial statements and disclosed separately in the footnotes to those  statements.
When the cost of the post-retirement health benefits of $744 million for  fiscal year 2000 is added to the Service’s total retirement costs of  $8.5 billion for fiscal year 2000, the total for retirement-related costs  becomes $9.3 billion in fiscal year 2000.  USPS projects that in fiscal year  2010, these total retirement-related costs will increase to $2 billion and  $14 billion, respectively, for a total of $16 billion.  The Service also  projected that these costs, in fiscal years 2001 and 2002, would increase to  $9.9 billion and $10.3 billion, an increase of $600 million and $400 million  over the preceding year for each of those years, respectively.  These  increases exert upward pressure on postal rates and constrict cash flows  needed for operating purposes.
section_title: Service Faces Major Challenges
paragraphs: Many stakeholders are calling for a structural transformation of the Service  because of the major financial, operational, human capital, and market  competition challenges confronting it.  Accordingly, in April 4, 2001,  testimony before the House Committee on Government Reform, the  Comptroller General announced that we had placed the Service’s  transformational efforts and long-term outlook on our high-risk list.  This  focused needed attention on the challenges facing the Service.  The Service  responded by establishing a Transformation Plan Task Force on July 25,  2001.  The task force will identify options to transform the Service so that it  will be able to resolve the many challenges it faces in the future.
section_title: Questions for Further Consideration and Analysis
paragraphs: As the Transformation Plan Task Force examines the impact of these  retirement costs and liabilities on the Service’s overall financial condition  and future operations, there are key questions that need to be addressed.   Once the task force has analyzed these questions in detail, it can weigh  various options and their long-term implications for the Service.  Some of  the specific questions that we see as being important include the following.
What is the significance of USPS’ growing retirement-related obligations  on various options that will be considered as part of its transformation?   How would issues relating to retirement-related obligations be  addressed if a specific option were to be chosen, such as transforming  USPS into a government corporation or a publicly owned company?
What is the impact of USPS retirement-related obligations, including  retiree health care costs, on its overall financial condition, equity  position, cash flows from operations, and ability to fund capital outlays  that depend on positive cash flows?  Also, what is the impact of the  Service’s retirement-related obligations on the scope and quality of  postal services that depend on the use of funds for continued  modernization and maintenance of capital assets?
What is the potential impact of growing retirement-related expenses on  postal rates?  Could this impact affect USPS’ ability to be successful in a  marketplace with increasing competition from electronic alternatives,  private delivery companies, and foreign postal administrations?
Under current law, is USPS fully covering OPM’s future retirement costs  for USPS employees, or is USPS paying more than is needed to cover  OPM’s future payments to USPS retirees?  Has OPM estimated the  amount of future obligations to USPS retirees, and has OPM determined  that USPS has contributed a sufficient amount, or, possibly, more than  enough, toward plan assets that will pay USPS retirees?
section_title: Agency Comments
paragraphs: USPS provided oral comments that substantially agreed with our report.   Matters of emphasis and points of clarity recommended by USPS have been  reflected in this report, as appropriate.  OPM provided written comments  that are reprinted in appendix IV, along with our comments.
We are sending copies of this report to the Chairmen and Ranking Minority  Members of the House and Senate Committees on Appropriations, the  Postmaster General, the Chairman of the Postal Board of Governors, the  Chairman of the Postal Rate Commission, the Chief Financial Officer of the  U.S. Postal Service, the Director of the Office of Personnel Management,  and interested congressional committees. We will also provide copies to  others on request.
If you have any questions on this report, please contact me at (202) 512- 2600 or Jeanette M. Franzel, Acting Director, at (202) 512-9471.  We can also  be reached by e-mail at steinhoffj@gao.gov or franzelj@gao.gov,  respectively.  Joseph Applebaum, Senior Actuary, Michael Fischetti, Meg  Mills, John Sawyer, and Fred Evans were key contributors to this report.
section_title: USPS Total Annual Retirement Plan Costs
paragraphs: FERS (including TSP)
FERS (including TSP)
section_title: USPS Retirement Liability for Employees’ Pay Increases
section_title: USPS Retirement Liability for Cost of Living Adjustments
section_title: Comments From the Office of Personnel Management
paragraphs: The following are GAO’s comments on the Office of Personnel  Management’s letter dated November 23, 2001.
subsections: section_title: GAO Comments
paragraphs: 1. The “fine tuning” items were not included in the report because the  amounts were paid to OPM by fiscal year 1998 and are no longer  outstanding liabilities of the Postal Service. 2. Our report has been revised to reflect that the Board of Actuaries of  CSRS determined the 5-percent discount rate used in the amortization  tables to calculate payments to be made to OPM. 3. Our Senior Actuary agreed with the OPM comment; therefore, we have  deleted the sentence from our report.