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Postal Retirement Issues
Changes to the Postal Service’s retirement plans are probably the most pressing need to maintain the long-term fiscal solvency of the USPS. PL 108-18, the Postal Civil Service Retirement System Funding Reform Act of 2003, was passed to prevent a $78 billion overpayment of Postal Service pension obligations. The Act creates a revised retirement formula that will avoid the overpayment by cutting Postal Service payments to the Office of Personnel Management (OPM) annually by nearly $3 billion. For the first two years the Act allows the Postal Service to use the savings as it sees fit to pay expenses and reduce debt to avoid a postage increase until 2006.
Beginning in 2005, however, the Act requires the Postal Service to operate as if it were following the old retirement formula. Instead of sending the funds to OPM or using them as they had for the previous two years, the money must go into an escrow account, to be spent only after the Postal Service tells Congress how it wants to use the funds.
Following standard accounting practices, however, these billions of dollars in escrow must be treated as an expense when determining the next postage rate increase. As a result of these added expenses, postage will go up sooner and by a larger amount— specifically, 5.4% higher just in 2006. The Postal Service predicts a two-cent increase in the cost of a first-class stamp in 2006—in addition to whatever increase might otherwise be proposed. Business mailers can expect a postage hike of more than 10%. Additional increases would occur for every year the escrow accounts exist.
That same act also included a provision transferring responsibility for the retirement cost of postal employees earned through military service to the Postal Service. Previously the Treasury Department funded these costs. This policy change created a direct cost transfer of $27 billion from taxpayers to postage ratepayers. Over 90% of the cost of military service was earned before July 1, 1971. That’s when the Post Office Department (a cabinet-level agency) became the United States Postal Service, an independent government agency. As more and more postal employees with military experience reach retirement age, this burden will continue to grow.
Like many federal agencies, USPS’s retirement costs will continue to escalate over the next decade as a result of the overlap in funding requirements under the retirement systems covering current employees and postal annuitants (CSRS for employees hired before 1984, FERS for employees since then). However, the postal service also faces looming financial nightmares with which other federal agencies are not faced. The problems with the retirement overpayments and retirees with military experience have the potential to bankrupt the Postal Service’s retirement system. It is certain that USPS will raise postage rates in the next three years but, without significant retirement reform, the needed increases could be huge. Congressional action is required on this issue, and the sooner Congress acts, the more secure the future of the Postal Service will be.