USPS Needs Policy Change, Not a Bailout, to Fix Pension Problems and Debt

With more voters than ever planning to take advantage of mail-in voting during the coronavirus pandemic, the United States Postal Service’s struggling finances have received significant attention as the November election approaches.

While it is tempting to blame USPS’ current fiscal troubles on the recession, pandemic and economic shutdowns, the US Postal Service has been experiencing significant revenue declines long before the pandemic. From 2007 through 2019, USPS lost $77 billion, with declines in mail volume helping keep it in the red for years.

Additionally, USPS has $120 billion in unfunded pension and other post-employment benefits (OPEB) liabilities. These unfunded liabilities represent retirement benefits that have been promised to workers that will eventually need to be paid. But the Postal Service’s funds are significantly short of meeting these promises.

The USPS pension systems are about 87 percent funded, with unfunded liabilities totaling about $50 billion. The Postal Service’s OPEB fund, which is the retiree health care portion of promised benefits, is only 44 percent funded and has $70 billion in unfunded liabilities.

These sizeable unfunded liabilities and continued revenue declines make it apparent that Congress’ proposed $25 billion bailout wouldn’t begin to fix the long-term debt that USPS has amassed. The Postal Service does not need a temporary fix and influx of cash, it needs comprehensive changes that would better serve taxpayers and pay for, and protect, the benefits promised to workers.

In 2019, two bills aimed at addressing the Postal Service’s pension and other post-employment benefit debt were proposed in Congress. The USPS Fairness Act, which passed the House at the start of 2020 and is currently before the Senate, is a misguided approach to solving the retirement fund’s issues. Instead of putting the plan on a track to solvency by making sure the accumulated debt is paid down faster, it completely dismantles the Postal Accountability and Enhancement Act of 2006, which was implemented to improve the funding of USPS retiree health benefits through the law’s requirement of benefit prefunding.

A retiree health benefit plan that is not prefunded is less secure for current and future retirees. There are many examples of public jurisdictions choosing not to prefund their defined benefit retiree healthcare benefits, but gathering the funding for these benefits in advance tends to be a policy that provides not only a more affordable, but also a more secure and stable retirement for current and future public retirees. Moving the USPS away from this practice would be inadvisable since paying these benefits “as you go” would end up costing taxpayers more money in the long-run and provide a less stable benefit to postal workers.

The second piece of legislation, the Postal Service Financial Improvement Act of 2019, would allow a portion of the OPEB plan’s assets to be invested in index funds. Index funds, in general, have lower expenses and fees compared to actively managed funds and the investment policy has been earning a favorable reputation in the public pension world. While far from a comprehensive solution to the challenges facing the USPS, this type of reform could help improve the fiscal health of the plan without piling additional costs on taxpayers. Unfortunately, this bill has received little traction in Congress to date.

The Postal Service’s retirement benefit troubles are playing a huge role in its deteriorating financial health. During these challenging times, it could be tempting to relax fiscal protocols or seek one-time fixes, like bailouts. Instead, Congress should prioritize sustainable ways to pay down unfunded liabilities, setting realistic assumptions for returns, and requiring USPS to fully make its required contributions to its retirement funds. These factors largely created USPS’ $120 billion unfunded liabilities and will continue to create funding problems going forward until they’re fully addressed.