U.S. Postal Service Retiree Health Benefits and Pension Funding Issues
Released: 2015-01-07T00:00:00

Background

In 1971, Congress established the U.S. Postal Service (USPS) and mandated that it operate as a self-supporting, wholly governmental entity. Previously, the federal government provided postal services via the U.S. Post Office Department (USPOD), a federal agency that was financially dependent upon annual appropriations from Congress. Members of Congress were involved in many aspects of the USPOD's operations, including the selection of managers (e.g., postmasters) and the pricing of postal services.

In 1971, Congress passed the Postal Reorganization Act (PRA; P.L. 91-375), which replaced USPOD with USPS—an "independent establishment of the executive branch." The PRA designed USPS to be a marketized government agency, that is, an agency that would cover its operating costs with revenues generated through the sales of postage and related products and services. Although USPS does receive an annual appropriation, the agency does not rely on appropriations. Its appropriation is approximately $90 million per year, about 0.1% of USPS's $65 billion operating budget. Congress provides this appropriation to compensate USPS for the revenue it forgoes in providing, at congressional direction, free mailing privileges to blind persons and overseas voters. Otherwise, USPS by law is directed to cover the costs of its operations from revenues deposited in the Postal Service Fund, a revolving account at the U.S. Treasury. Thus, USPS's operational costs are to be borne not by the public as a whole, but by ratepayers (i.e., those individuals and organizations who purchase postage).

USPS employees are covered by, and may be eligible for, benefits under the same two pension plans that cover nearly all civilian federal workers: the Civil Service Retirement System (CSRS) for employees first hired before 1984 and the Federal Employees' Retirement System (FERS) for employees first hired in 1984 or later. In addition, by law, USPS retirees (and employees) may participate in the Federal Employees Health Benefits Program (FEHBP).

USPS's recent deficits—$40 billion since FY2007—have prompted much discussion over possible reforms to the agency and its operations. USPS's retiree health benefits and pension funding policies have been part of this discussion, in part because they represent significant costs to the agency. In FY2013, prefunding USPS's retiree health benefits cost the agency $5.6 billion and funding its pensions cost $5.7 billion. This amounted to 15.7% of USPS's $72.1 billion operating expenses.

In addition, there are concerns over the possible negative ramifications on postal retirees and the public were USPS to insufficiently fund its retirees' health benefits or pensions. For example, the Office of Personnel Management (OPM) reports that the U.S. Treasury (and, therefore, taxpayers) would be liable for any USPS shortfalls in funding its pensions.

Recent USPS Retiree Health Benefits Funding Issues10

Since FY2007, USPS has been required to prefund its current employees' future retirement benefits. This policy was included in an omnibus postal reform law, the Postal Accountability and Enhancement Act (PAEA; P.L. 109-435 , enacted in December 2006). This prefunding policy has become contentious since USPS began posting multi-billion dollar financial losses in FY2007 and missing prepayments.

The debates concerning retiree health benefits prefunding have centered on both the principle of prefunding and the PAEA's execution thereof. Hence, some in Congress have advocated abolishing the prefunding requirement entirely. Others in Congress have proposed various ways to revise the PAEA's funding schedule so as to continue prefunding but to alleviate USPS's costs in the short term.

The PAEA Prefunding Requirement

Prior to the enactment of the PAEA, USPS funded its share of retiree health premiums on a pay-as-you-go basis. Put in simple terms, formerly USPS annually tabulated the number of retirees and then paid its portion of the health premiums due for those retirees. (USPS retirees also pay a portion of their health premiums.)

The PAEA required USPS to continue contributing to current retirees' benefits from the Postal Service Fund each year. The law also obliged USPS annually to set aside funds for the future retiree health benefits of current employees.

Specifically, the PAEA created a 50-year payment schedule, which includes 10 years of statutorily prescribed prefunding payments (FY2007-FY2016) into the Postal Service Retiree Health Benefits Fund (RHBF). Table 1 depicts the statutorily prescribed prepayments.

In FY2017, the statutorily prescribed payment amounts conclude. Between FY2017 and FY2056, however, USPS would continue to make annual payments to RHBF. The amount of these payments would be determined by OPM. Per PAEA, OPM is to compute on an annual basis, the size of current employees' future retiree healthcare benefit liability and the current RHBF balance and then to determine a schedule of annual payments to liquidate any outstanding liability by September 30, 2056.

Disputes over Prefunding Future Retiree Health Benefits

Although enacted with little, if any, ostensible criticism, the PAEA's prefunding policy subsequently has become very contentious.

The criticisms of prefunding include the following:

1. For 36 years (1970-2006), USPS paid its current retiree health benefits out of pocket without incident. 2. No other federal agency prefunds its current employees' future retirement health benefits, so it is unfair to require USPS to do so. 3. Private-sector companies that prefund their future retiree health benefits do not typically fund 100% of the obligation. 4. Prefunding was primarily a policy designed to contend with a budget scoring issue caused by USPS overfunding its pensions. 5. Prefunding is financially harming USPS—it is draining USPS's cash, and it has had a significant role in producing the agency's recent deficits.

Arguments advanced in favor of prefunding include the following:

1. The pay-as-you-go approach creates an inaccurate depiction of USPS's financial health. "Because the Service was ignoring a very expensive fringe benefit in its income statement, its reported costs were artificially low and its reported income artificially high." 2. The pay-as-you-go approach is inequitable in that "current [postage] ratepayers are not paying for the full costs of the services they are receiving." Instead, a portion of current employees' compensation costs will be paid by future mailers. 3. "Based on known demographic trends, the Service's share of its retirees' health insurance premiums is expected to continue rising until about 2040. Under the Service's existing accounting and rate-setting methods, more significant and frequent rate hikes are likely to be needed for future ratepayers to cover the costs of benefits that are being earned by current employees." 4. Prefunding future retirement benefits provides compensation security for current employees. 5. Prefunding future retiree health benefits protects U.S. taxpayers from a possible bailout should USPS health benefits costs exceed USPS's cash on hand.

Beyond these debates, two additional issues have arisen with the PAEA prefunding policy as enacted. First USPS has not had sufficient cash to meet the current statutory RHBF payment schedule. Second there have been actuarial disputes over the size of USPS's future retiree health benefits liability and, by implication, the size of the annual FY2007-FY2016 RHBF required payments.

USPS's Difficulties in Meeting the RHBF Payment Schedule

While the principle of prefunding continues to be debated, a more recent concern is the practicality of the FY2007-FY2016 payment schedule. In short, although the law states USPS must pay more than $5 billion per year through FY2017, the agency has not had sufficient cash to make all these payments.

Between FY2007 and FY2012, USPS's financial condition eroded considerably. Mail volume fell 25.1%, from 212 billion pieces to 159 billion pieces. USPS's revenue declined 12.8%, from $74.8 billion to $65.2 billion. The agency's debt grew from $4.2 billion (FY2007) to $15 billion, the maximum amount permitted by statute. The fall in revenues combined with the FY2007 and FY2008 RHBF payments have drained the agency's cash supply.

USPS's difficulties in meeting the RHBF payment schedule date from FY2009, when Congress reduced that year's payment owed from $5.4 billion to $1.4 billion. This relief helped USPS have sufficient cash on hand to make the FY2010 payment. Since then, however, the agency has defaulted on the FY2011, FY2012, and FY2013 RHBF payments.

Disputes over the Size of USPS's RHBF Liability and Annual RHBF Payments

In FY2012, OPM calculated USPS's future retiree health benefits liability to be $93.6 billion. OPM estimated USPS had funded $45.7 billion of this obligation, which leaves an unfunded obligation of $47.9 billion.

The estimation of healthcare costs requires making certain assumptions. Thus, USPS has noted,

[b]ecause calculation of this [retiree health benefit] liability involves several areas of judgment, estimates of the liability could vary significantly depending on the assumptions used. Utilizing the same underlying data that was used in preparing the [above] estimate... the September 30, 2012, unfunded obligation could range from $35 billion to $63 billion, solely by varying the inflation rate by plus or minus 1%, and the 2011 unfunded obligation would range from $34 billion to $60 billion.

The size of USPS's estimated health benefits obligation is consequential; it affects the agency's reported financial results because the Postal Service is expected to pay these obligations that are owed to retirees. The larger the obligation, generally, the larger the yearly USPS outlays that would need to be made to retire that obligation.

Both the U.S. Postal Service Office of Inspector General (USPSOIG) and the Postal Regulatory Commission (PRC) have released studies arguing that the size of USPS's future retirees' health benefits obligation likely will be lower than OPM has estimated. USPSOIG and PRC concluded that USPS could have paid $1.6 billion per year and $3.2 billion per year, respectively, between FY2007 and FY2016 to adequately fund its future retiree healthcare obligation. The differences between these estimates are due to the differing assumptions used. For example, OPM assumed healthcare costs would rise 7% per year, whereas USPSOIG assumed a rate of 5% per year. OPM assumed USPS's workforce size would stay the same size; PRC assumed USPS's employee cohort would become smaller due to downsizing.

Recent Proposals for Changing the Prefunding Policy

In the 113 th Congress, bills were introduced to change the current RHBF policy. These bills either proposed to eliminate the RHBF payment schedule or modify it to reduce the size of the annual payments. These bills included

The Postal Service Protection Act of 2013 ( H.R. 630 ) and ( S. 316 ), which would have abolished the RHBF prefunding policy and RHBF payment schedule. The Innovate to Deliver Act of 2013 ( H.R. 2690 ), which would have replaced the current RHBF payment schedule with a new payment schedule. USPS would have made no RHBF payments until 2016. The total liability would have been amortized between 2016 and 2053. H.R. 2690 also would have required USPS to fund 80% of its total liability (as opposed to the current 100% funding requirement). The House version of the Postal Reform Act of 2013 ( H.R. 2748 ), which would have replaced the current RHBF payment schedule with a new payment schedule. USPS would have made no RHBF payments until 2016. The total liability would have been amortized between 2016 and 2056. H.R. 2748 also would have required USPS to fund 80% of its total liability (as opposed to the current 100% funding requirement). The Senate version of the Postal Reform Act of 2013 ( S. 1486 ), which would have replaced the current RHBF payment schedule with a new payment schedule. USPS would have made no RHBF payments until 2016. The total liability would have been amortized between 2016 and 2052. S. 1486 also would have attempted to reduce USPS's long-term retiree health benefits costs by moving some USPS retirees onto Medicare and authorizing USPS to opt its employees (and future retirees) out of the FEHBP and into a new health insurance program. Finally, the bill aimed to further reduce USPS's prefunding costs by requiring USPS to fund 80% of its total liability (as opposed to the current 100% funding requirement).

Recent USPS Pension Funding Issues43

Recent policy debate has focused on two issues related to the funding of retirement benefits for USPS employees. First, the allocation of costs between USPS and the federal government in the funding of USPS benefits under CSRS has been debated. Second, the issue of a surplus or "overpayment" made by USPS on behalf of its FERS employees has been identified; although amendments to current law would be required to refund any payments to USPS.

USPS CSRS Funding: Allocation of Costs

CSRS provides pension benefits to eligible USPS employees and other federal employees first hired prior to 1984. When the Postal Reorganization Act (PRA; P.L. 91-375) created USPS in 1971, the law resulted in a situation in which some USPS employees performed service under CSRS as employees of both (1) the old USPOD and (2) the newly created USPS. The required CSRS employer contributions USPS made on behalf of its CSRS employees are no different than the employer contributions made by other federal agencies; however, it was not immediately clear how the funding of CSRS benefits for employees with service under both USPOD and USPS should be assigned. The PRA did not specifically allocate responsibility for the costs of CSRS benefits for these individuals between USPS and the federal government.

In 1974, P.L. 93-349 required that responsibility for the costs of CSRS retirement benefits due to pay increases granted by USPS (i.e., pay increases after July 1, 1971) be transferred to USPS from the federal government. Subsequently, the Postal Civil Service Retirement System Funding Reform Act of 2003 (P.L. 108-18), made USPS liable for the full dynamic normal cost of all CSRS benefits attributable to post-1971 service. In 2006, PAEA ( P.L. 109-435 ) made additional changes to the methodology used by OPM in determining a USPS funding surplus or liability for CSRS benefits.

Under current law, OPM calculates the pay and benefits accrued for CSRS employees under USPOD separately from the pay and benefits accrued under USPS. The federal government is responsible for the costs of the former service, whereas USPS is responsible for the costs of the latter service. For example, an employee with 15 years of USPOD service and 15 years of USPS service, his or her CSRS benefit would be financed by the federal government based on the pay and the 15 years of service prior to 1971 and by USPS based on final pay and the 15 years of service beginning in 1971. Because pay generally rises as job tenure increases (and P.L. 93-349 required USPS to finance the retirement costs of any pay increases beginning in 1971), the pay measure used to calculate the federal government's share of the CSRS benefit cost in this example is lower than the pay measure used to calculate USPS's share of the benefit cost. Thus, in this example, USPS would finance a larger portion of the CSRS benefit cost than the federal government.

Two agencies with USPS oversight or auditing functions have asserted that OPM's current method of allocating the costs of CSRS benefits for employees with service under both USPOD and USPS is incorrect. For instance, a January 2010 report issued by USPSOIG claimed that the allocation of CSRS pension costs for employees with service as USPOD and USPS employees should be directly proportional to the number of years spent employed by each agency. That is, in the example above, the federal government should fund one-half of this individual's CSRS annuity and USPS should fund one-half of the retirement benefit.

A PRC June 2010 report maintained that final high-three pay rather than 1971 salary should be used in calculating the federal government's portion of these CSRS benefits. As stated above, pay generally rises as job tenure increases; therefore, this method of calculation would increase the pay measure used to calculate the federal government's liability, thereby shifting the cost of CSRS benefits from USPS to the federal government for individuals with service under both USPOD and USPS. In the example used above, the federal government would fund the first 15 years of service at a benefit accrual percentage of 26.25% and USPS would fund the next 15 years of service at a 30.00% benefit accrual percentage—both at the same high-three final pay.

According to the Office of Personnel Management Office of Inspector General (OPMOIG) recent analyses, however, neither the Postal Civil Service Retirement System Funding Reform Act of 2003 ( P.L. 108-18 ) nor PAEA changed the fundamental allocation of costs for increased CSRS benefits due to post-1971 salary increases between USPS and the federal government as set out under P.L. 93-349 .

In addition, in a December 2011 analysis of this issue, the U.S. Government Accountability Office (GAO) concluded,

OPM has carried out this requirement [under P.L. 93-349 ] by calculating the retirement costs for pre-1971 service (those that the federal government is responsible for) based on the employee's credited service and rate of basic pay on June 30, 1971, the last day the [US]POD was in existence. In our view, the 2003 and 2006 Acts did not change the fundamental allocation made by the 1974 Act and thus OPM's current methodology continues to be consistent with law.

Because past laws have set out the current method of allocation— P.L. 93-349 ; P.L. 108-18 ; and PAEA—any reallocation of costs for USPS CSRS employees with service under both USPOD and USPS would require changes to law. Absent a reduction in the cost of financing CSRS pensions, a reduction in the proportion of CSRS pension costs allocated to USPS—as under the USPSOIG and PRC reports—would increase the current unfunded liability of the Civil Service Retirement and the Disability Fund (CSRDF), the federal trust fund that finances CSRS and FERS benefits. This reallocation of CSRS costs would also result in an equal increase in CSRS pension expenses borne by the U.S. Treasury.

USPS FERS Funding: Overpayment

FERS covers most of the civilian federal workforce, including USPS employees, first hired in 1984 and later. FERS is required to be fully funded under 5 U .S.C. § 8423 . By law, the FERS retirement benefit must be prefunded according to its dynamic normal cost. The dynamic normal cost of a pension represents the amount of funds that must be set aside annually to fully fund benefits for workers who will continue to accrue new benefits, including the effects of employee pay raises, post-retirement cost-of-living adjustments (COLAs), and changes in the rate of interest.

Federal agencies and USPS are required to make FERS contributions at a rate that is the dynamic normal cost of FERS minus required employee contributions. Currently, for regular FERS employees, agencies and USPS contribute 11.9% of pay for FERS employees first hired before 2013 and 9.6% of pay for FERS employees first hired after 2012.

USPS maintains that it has made an overpayment of agency contributions on behalf of its FERS employees. OPMOIG agrees that USPS has made this overpayment; it also notes that a statute would need to be enacted to authorize OPM to refund the money. GAO has also concurred with this assessment.

In general, USPS's FERS overpayment is a result of the significantly different composition of USPS's FERS workforce compared with FERS employees in the rest of the federal workforce. That is, the dynamic normal cost of FERS benefits for USPS employees is less than the dynamic normal cost of FERS benefits for FERS employees in the rest of the federal workforce. Currently, OPM uses the same demographic assumptions to calculate the dynamic normal costs for all FERS employees—without distinguishing between the characteristics of USPS and non-USPS employees. Current OPM estimates using the same demographic assumptions for all FERS employees, including USPS employees, yield a USPS FERS overpayment of about $3 billion as of FY2012:

According to the most recent actuarial estimate received from OPM, the Postal Service had overfunded its FERS obligations by $2.6 billion at September 30, 2011, the latest actual data available. The reduction in the estimated surplus from amounts previously reported resulted primarily from changes to government-wide economic and demographic assumptions made by OPM, as well as actual fiscal year 2011 experience. OPM's most recent calculation shows that the FERS surplus was projected to grow to approximately $3.0 billion by September 30, 2012. The Office of Inspector General has reported that if Postal Service specific assumptions and demographics are used to calculate the FERS liability, rather than government-wide averages, the overfunding amount would be substantially greater.

USPSOIG claims that an even larger USPS FERS overpayment would result from the use of USPS-specific demographic assumptions. According to a USPSOIG report released in September 2013, using USPS-specific demographic assumptions, rather than average demographic assumptions for all FERS employees, would yield a USPS FERS overpayment of $12.5 billion for FY2012, which is $9.5 billion more than the surplus estimated by OPM using the same demographic assumptions for all FERS employees. USPSOIG's report notes the following USPS-specific demographic and other characteristics that lead to the larger USPS FERS overpayment for its employees:

smaller pay increases; a more condensed pay scale; lower rates of service withdrawal and early retirement; higher rates of in-service mortality and disability retirement; and smaller improvements in mortality for males.

Proposals Related to USPS Pension Funding

Congress has considered a range of legislative proposals to address these two USPS pension funding issues. Four types of policy proposals were introduced in the 113 th Congress. First, there was legislation that would change the allocation of costs for CSRS benefits for certain USPS employees. Second, several pieces of legislation in the 113 th Congress proposed to refund the FERS overpayment to USPS. Third, there were proposals to alter the calculation of the costs of USPS FERS benefits. Finally, there was a proposal to provide non-FERS coverage for newly hired USPS employees. Examples of these proposals are described below. Table 2 provides summary information on these proposals.

Proposals to Reallocate CSRS Costs

The House and Senate versions of the Postal Service Protection Act of 2013 ( H.R. 630 and S. 316 ) both included a proposal to alter the allocation of costs of CSRS benefits for individuals with service under both USPOD and USPS. H.R. 630 and S. 316 would have required OPM to use final high-three pay rather than 1971 salary in calculating the federal government's portion of these CSRS benefits. Any surplus created by this reallocation of CSRS costs would have been transferred to the Postal Service Retiree Health Benefit Fund and the Postal Service Fund.

Proposals to Refund USPS FERS Overpayment

Several proposals would have provided USPS a refund of the FERS overpayment:

The House version of the Postal Service Protection Act of 2013 ( H.R. 630 ), would have refunded any USPS FERS overpayment for FY2010. The Senate version Postal Service Protection Act of 2013 ( S. 316 ), would have refunded any USPS FERS overpayment for FY2013. The United States Postal Service Stabilization Act of 2013 ( H.R. 961 ) and the Innovate to Deliver Act of 2013 ( H.R. 2690 ) would have refunded any USPS FERS overpayment in any fiscal year that a surplus occurred. The Postal Reform Act of 2013 ( H.R. 2748 ) would have refunded any USPS FERS overpayment in any fiscal year that a surplus occurred minus any USPS CSRS and other federal retirement liabilities. The Postal Reform Act of 2013 ( S. 1486 ) would have refunded any USPS FERS overpayment for FY2013 and future years.

Proposals to Change Calculation of USPS FERS Liabilities

The United States Postal Service Stabilization Act of 2013 ( H.R. 961 ) and the Innovate to Deliver Act of 2013 ( H.R. 2690 ) would have required OPM to calculate the dynamic normal costs of USPS FERS benefits separately for USPS employees.

The Postal Reform Act of 2013 ( H.R. 2748 ) and the Postal Reform Act of 2013 ( S. 1486 ) would have required OPM to calculate a separate dynamic normal cost for USPS FERS benefits and use demographic and economic assumptions specific to USPS's workforce.

Proposals to Provide Non-FERS Coverage for New USPS Employees

The Postal Reform Act of 2013 ( S. 1486 ) would have granted USPS authority to use collective bargaining to negotiate retirement benefits for new USPS employees. That is, USPS employees hired after enactment of this bill could have been covered by a collective bargaining agreement that provided retirement coverage under one or more new retirement benefit plans, not under FERS.