The Postal Service is overfunding its two pension plans by more than $13 billion, according to the latest projections by the Office of Personnel Management (OPM). This overfunding comes at a significant cost to the organization as it has racked up debt to pay for prefunding of its healthcare plan, while continuing to make large annual payments into overfunded pension plans.
The overfunding of the Federal Employee Retirement System (FERS) has been well-documented in recent years, and it is addressed in some of the reform bills introduced in the last session of Congress. Nearly everyone recognizes that FERS is overfunded, and most agree that a fix is needed to return some portion of the overfunding to the Postal Service. But what was $7 billion in FERS overfunding has now grown to $11.4 billion, according to OPM's latest projections. Equally notable, however, is that the Postal Service has overfunded the Civil Service Retirement System (CSRS) pension plan by about $1.7 billion, according to OPM. Only two years ago, the CSRS pension plan appeared to be underfunded.
Let's make clear that the overfunding of these pension plans is separate from the $75 billion overpayment to CSRS pension plan that the Office of inspector General found based on how retirement costs were assigned to former employees of the old Post Office Department. (The Postal Regulatory Commission determined that the Postal Service overpaid by $55 billion.) This article won't get into the overpayment of CSRS and puts that whole argument aside for now. The current overfunding of the pension plans discussed in this article is based on OPM's calculations and is not disputed among the various parties.
Each year, OPM recalculates the Postal Service's retirement pensions for the previous year (in this case FY 2010) and makes a projection for the just-completed fiscal year (FY 2011). The chart from the Postal Service's 2011 Report on Form 10-K financial report (download the PDF to see), shows that OPM has determined that FERS is projected to be $11.4 billion overfunded for FY 2011 and CSRS will be $1.7 billion overfunded, bringing the total to $13.1 billion.
Between 2009 and 2010, something changed in OPM's assumptions, so that for CSRS the accrued liability for 2010 and the projected liability for 2011 are now almost $10 billion less than the liability in 2009. The liabilities for CSRS are now less than the current balance fund, leaving a surplus in CSRS, just like FERS. It's not clear what has changed because the Postal Service's financial reports do not provide that level of detail. It could be a change in assumptions, such as OPM's estimates for future inflation rates and interest rates or even how many people will retire or die in a given year. Any significant change in assumptions would have an impact on the liabilities, but the sizable change in liabilities from $202.6 billion in 2009 to $193 billion in 2010 is curious.
The overfunding of the Federal Employee Retirement System (FERS) has been well-documented in recent years, and it is addressed in some of the reform bills introduced in the last session of Congress. Nearly everyone recognizes that FERS is overfunded, and most agree that a fix is needed to return some portion of the overfunding to the Postal Service. But what was $7 billion in FERS overfunding has now grown to $11.4 billion, according to OPM's latest projections. Equally notable, however, is that the Postal Service has overfunded the Civil Service Retirement System (CSRS) pension plan by about $1.7 billion, according to OPM. Only two years ago, the CSRS pension plan appeared to be underfunded.
Let's make clear that the overfunding of these pension plans is separate from the $75 billion overpayment to CSRS pension plan that the Office of inspector General found based on how retirement costs were assigned to former employees of the old Post Office Department. (The Postal Regulatory Commission determined that the Postal Service overpaid by $55 billion.) This article won't get into the overpayment of CSRS and puts that whole argument aside for now. The current overfunding of the pension plans discussed in this article is based on OPM's calculations and is not disputed among the various parties.
Each year, OPM recalculates the Postal Service's retirement pensions for the previous year (in this case FY 2010) and makes a projection for the just-completed fiscal year (FY 2011). The chart from the Postal Service's 2011 Report on Form 10-K financial report (download the PDF to see), shows that OPM has determined that FERS is projected to be $11.4 billion overfunded for FY 2011 and CSRS will be $1.7 billion overfunded, bringing the total to $13.1 billion.
CSRS is a closed system, which means that it is not accepting any new employees. Postal employees first hired after December 31, 1983, are part of FERS. Unlike CSRS employees, FERS employees contribute to and participate in Social Security. They can also participate in a 401-K style program called the Thrift Savings Plan. The FERS annuity is the third part of the program. Employees contribute 0.8 percent their paychecks, and the Postal Service contributes 11.7 percent. (FERS was designed so the participants would pay the same contribution for the annuity and Social Security that CSRS employees paid for their pension.) Like all pension plans, the party that manages them - in this case OPM - has to make assumptions about certain things, such as future interest rates, the rate of inflation, future salary increases, how many people will retire in a given year, and how long people will receive their pensions.
Between 2009 and 2010, something changed in OPM's assumptions, so that for CSRS the accrued liability for 2010 and the projected liability for 2011 are now almost $10 billion less than the liability in 2009. The liabilities for CSRS are now less than the current balance fund, leaving a surplus in CSRS, just like FERS. It's not clear what has changed because the Postal Service's financial reports do not provide that level of detail. It could be a change in assumptions, such as OPM's estimates for future inflation rates and interest rates or even how many people will retire or die in a given year. Any significant change in assumptions would have an impact on the liabilities, but the sizable change in liabilities from $202.6 billion in 2009 to $193 billion in 2010 is curious.
What is even more curious is that this public information has not captured the public's attention. True, few people read financial statements in any detail, but the Postal Service's financial situation is regularly dissected in the press and on Capitol Hill. It seems mailer groups would be raising the issue: FERS and CSRS have a $13 billion surplus! This is their money. Postage revenue pays for these funds. Yes, employees make contributions to the funds as well, but employees' salaries are paid from revenues raised on the sale of postage and services.
For illustrative purposes, let's put this in very basic layman terms. This $13 billion surplus would be enough to reduce the price of a stamp by 17 cents for a whole year, assuming each penny of the stamp price brings in about $750 million in revenue. What if we were lowering the stamp to 27 cents rather than raising it to 45 cents on January 22? Wouldn't that be a remarkable headline? And why is the Postal Service being forced to take on enormous debt to prepay into a retiree health fund when it has a $13 billion surplus in its pension funds?
Some have argued that we need to look at the Postal Service's retirement liabilities as a whole - all of the retiree health and pension plans - and not just the funds that are overfunded. So let's do that. The Postal Service has total liabilities of $359 billion and total assets in the funds of $326 billion. This means its retirement plans are more than 90 percent funded, a remarkable achievement for an organization under financial duress and a feat unmatched in the federal government. What other organization would operate like this?
The pension plan overfunding begs for a thorough review of the process. We need to put this whole thing in perspective. The Postal Service has pension plans that are overfunded. Overall, all of its retirement plans (health and pension) are 90 percent fully funded. The goal should be to ensure the funds are managed responsibly, with consistency and sound actuarial principles as the foundation. Consider structuring the management of the pension funds with an automatic stabilizer that would let the Postal Service amortize surpluses over a number of years to set things right. Stabilizers are already in place for when the funds run a deficit. Set up continuous reviews of the funds so they are monitored regularly.
Why is the Postal Service consistently overfunding FERS? What is going on in CSRS pension plan? Take a close look at why the assumptions have changed so dramatically and determine if the Postal Service's employee population is significantly different from the rest of the federal government. Then, adjust the assumptions, and the plans, accordingly.
But most importantly, take these funds out of the political process. Why have we tied proper fund management to the larger issue of reforming the nation's postal system? We should not let the important work of shaping a new business model for a communications infrastructure get bogged down in issues around fund management.
But most importantly, take these funds out of the political process. Why have we tied proper fund management to the larger issue of reforming the nation's postal system? We should not let the important work of shaping a new business model for a communications infrastructure get bogged down in issues around fund management.
Over the years, I have argued that a sound postal policy approach would be to let the operator operate and the regulator regulate. Let's add to this tune a new verse: take funds management out of the political arena and let Congress legislate the important policy issues.
