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. 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. 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. 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. 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. 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. 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.