March 12, 2004

March 12, 2004 | WebMemo on Regulation

Passing the Buck on Postal Pensions

Seemingly arcane and boring issues can sometimes have startling implications. Recently, the President's Commission on the United States Postal Service recommended that the Service turn over responsibility for the funding of military service credits for some postal employees' pensions to the Treasury, rather than continuing to pay those costs itself. This would be a step in the wrong direction that would primarily serve to subsidize mass mailers while making it more difficult to bring federal spending under control.


Passing the Buck

The issue deals with who will pay for the military service credits of postal workers who joined the United States Postal Service (USPS) prior to January 1, 1984. Under the Civil Service Retirement System (CSRS), all federal employees, including those employed by the USPS, receive credit towards retirement for time they spent in the military. Thus, when a postal worker with military service applies for a CSRS pension, it is calculated by adding together his or her years of military service and USPS employment. Currently, the USPS pays the full cost of that pension. The President's Commission proposes that the funding responsibility be split, with the USPS paying the portion of the pension related to USPS employment and the Treasury paying for the portion related to military service. Such a change would be a step back from two important principles: the full funding of federal retirement benefits and the special status of the USPS.


Back in the 1980s, Congress recognized that the government would not be able to pay for all of the retirement benefits promised to then and future federal employees. It responded by replacing the largely unfunded CSRS system with a new Federal Employees Retirement System (FERS) that would be fully funded by both employee contributions and assessments on agencies. Federal employees - including USPS employees - who were already on the payroll could stay in CSRS, but all new employees as of January 1, 1984 were required to go into FERS.


While Congress would still have to deal with the unfunded liabilities of the old CSRS system, the principle was established that all future pension plans would be funded. Both the Clinton Administration and the Bush Administration proposed to extend this principle by requiring federal agencies to pay CSRS costs in the same way that they now pay FERS costs. While Congress has yet to approve this change, it remains the most responsible way to pay for remaining CSRS costs.


The second principle is the special nature of the USPS. When the old Post Office Department was changed into the USPS in 1970, Congress created an entity that was no longer a government department, but rather a special government-owned corporation. The USPS was required, to the extent possible, to pay for the costs of delivering mail from its own revenues, so that delivering the mail would not be a burden to taxpayers or hurt the market through preferential subsidies that put potential competitors at a disadvantage. This included paying for the retirement costs of USPS employees.


In 2002, this second principle was reinforced when the Office of Personnel Management found that the USPS was on course to over-fund its CSRS pension obligations by about $78 billion. At the agency's recommendation, Congress changed the law so that the USPS would pay no more than the full costs of the CSRS pensions earned by its employees. These substantial savings were expected to allow USPS to defer postal rate increases.


An Irresponsible Step

The recommendations of the President's Commission are a step in the wrong direction on both principles. First, rather than increasing the funding for federal employees' pensions, they would actually increase the amount that is unfunded. The USPS would stop paying the full cost of its employees' pensions and would transfer $27 billion worth of those costs to taxpayers. While such a move might help mass mailers by potentially delaying postal rate increases, it would hurt taxpayers.


Second, while the Commission pointed out that no other federal agency currently has the responsibility for paying the military service credits of its employees, it missed a crucial point. The USPS is not a federal agency, but instead a federally owned corporation that in recent years has been able to meet its costs without the extensive federal subsidies that it once received. Any step that moves the USPS back towards federal agency status will only make further postal reform harder and increase the likelihood that taxpayers will again end up subsidizing its operations.


Congress should not shift the funding responsibility for the CSRS military service credits of USPS employees to the Treasury. Such a move is contrary to the principles of sound economics and sound accounting. It would also be doubly irresponsible. It would result in taxpayer's partially subsidizing mass mailers while making it still harder to bring federal spending under control.

David C. John is Research Fellow in Social Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

David C. John Senior Research Fellow in Retirement Security and Financial Institutions
Thomas A. Roe Institute for Economic Policy Studies