The United States Postal Service has been struggling to pay its retiree healthcare benefit bill for years. And now, Postmaster General Louis DeJoy is proposing a new approach to “fixing” USPS, one that includes postal-rate increases and significant changes to retiree healthcare.
USPS currently has over $120 billion in unfunded pension and other post-employment benefits. In an attempt to lower USPS’s short-term costs associated with saving for retirees’ benefits, DeJoy is working with lawmakers on legislation that would eliminate the current prefunding requirement for retirement benefits. His plan would also place USPS current and future retirees in Medicare rather than fund the private healthcare benefits retirees currently enjoy.
Last month a group of bipartisan lawmakers reintroduced the USPS Fairness Act, which seeks to make various reforms to the postal service and also address the retiree healthcare problem. A similar bill passed from the full House last year.
But what would these changes mean for current and future retirees exactly?
Currently, USPS is required to make annual contributions into a fund that will one day issue pension checks to an employee in retirement. The advantage of this system, referred to as prefunding, is that these contributions are invested in the market and managed by a team of financial experts tasked with growing the investments. The majority of savings for a typical public pension fund come from these investment earnings.
The change proposed by DeJoy and the Fairness Act would transition USPS to a “pay-as-you-go” system that does not require the agency to contribute to an investment fund each year, but rather pays for benefits the year they are owed to retirees. Currently, investment returns make up more than 60% of public pension plan revenues. Without prefunding taxpayers will be on the hook for the full benefit value rather than be able to take advantage of market gains.
Moving retiree health benefits to Medicare isn’t an answer either. Such a transition would not reduce overall health care costs enough to save USPS significant funds long term. A 2018 evaluation on the costs associated with moving USPS retirees to the government managed plan also estimated that a retiree might have to pay another $1,600 or more per year in Medicare premiums. In addition, Medicare currently has $37 trillion in unfunded liabilities and is on track to become insolvent in 2026.
Abandoning prefunding pension practices is a misguided approach to lowering current costs without solving USPS’s long term financial issues. A pay-as-you-go system would end up costing taxpayers and employees more money and putting retirees onto Medicare is not the easy solution it may appear to be.
Congress and the Postmaster General should prioritize paying off USPS’s existing debt and ensuring that the system will be able to provide promised retirement benefits.
Jen Sidorova of Buffalo is a policy analyst at the Reason Foundation and a contributor at Young Voices. Find her on Twitter @Jen_Sidorova.