April 14, 2020

Some Key Myths And Facts

Some Key Myths And Facts

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Yes, I’ve written about the Post Office before, both back a year ago and at the beginning of the month. This article attempts to distill the issue into basics, a TL;DR version of those articles, as concerns about the United States Postal Service’s short- and long-term viability continue. Also, I am discussing neither the general business model nor speculation as to the Trump administration’s intentions. Bearing that in mind, let’s begin:

MYTH: The Post Office is required to fund pensions in advance in a manner applies to no other private-sector company.

FACT: ALL companies are required to fund any pension promises they make to their employees. (The only exceptions are for top executives, who can lose their pensions if a company goes bankrupt, and for entities that aren’t actually “companies” – state and local governments and churches.) NONE of them are permitted to take a “pay as you go” approach but must contribute to a pension fund an amount equivalent to what a worker has accrued that year in benefit promises, regardless of how far into the future that worker will be retiring, and must make up for any shortfalls due to asset losses or other reasons. The USPS and private sector companies use the same general actuarial principles to do so, though there are differences in assumptions, particulars of the calculations, etc.

What is distinctive about the USPS is that, a a result of the 2006 Postal Accountability and Enhancement Act (PAEA), they are also required to pre-fund their retiree medical promises. However, what is also distinctive is that any private-sector company may simply cancel its retiree medical benefits at any time; the funding requirement for the USPS exists because only an act of Congress would enable them to cut these benefits.

However, even here, again, all companies which promise retiree medical benefits must account for them in their financial reporting even if they don’t prefund.

MYTH: The requirement to fund retiree medical benefits in such a short period of time was especially burdensome and unfair.

FACT: Yes, the 10-year contributions specified in the 2006 law were especially high because they aimed to “jump start” the fund — and because the amounts were meant to match anticipated savings from reduced pension contributions. (See more at this “primer”.) Should Congress have been more flexible when the USPS first started running into trouble with the Great Recession and the shift from snail to e-mail, rather than its miserly one year’s funding relief in 2009? Most likely. Did they refuse to do so because they wanted to force privatization? I don’t care to speculate.

But that 10 year period ended in 2016, so it can’t be blamed for current USPS woes. We are now in the follow-on period in which the USPS is intended to be amortizing its remaining unfunded liability over 40 years, to 2056. And this 40 year period is exactly the same length of time as private-sector employers were given to remedy underfunding levels when pension funding requirements were first implemented with ERISA in 1974.

MYTH: Without these burdensome requirements, the USPS would neither be losing money nor experiencing its current and/or pre-COVID cashflow crunch.

FACT: First, the PAEA contributions have no bearing on cashflow because the USPS is not making those contributions.

In the aftermath of the Great Recession, Congress reduced the 2009 contribution, and, when it refused to make any further changes, the USPS simply defaulted, that is, refused to pay the contributions mandated by the PAEA. That continues to be the case today. As it states in its 10-K, with respect to retirement benefits, “the Postal Service did not make any of these [required pension funding] payments in order to preserve liquidity to ensure that the ability to fulfill the primary universal service mission was not placed at undue risk”; with respect to contributions to the retiree medical fund, the USPS states, “As indicated above, the Postal Service recorded an expense for these amounts but did not make these payments in order to preserve liquidity to ensure that the ability to fulfill the primary universal service mission was not placed at undue risk.”

In addition, with respect to financial reporting, here are the key figures for 2019:

Healthcare benefits paid out of the Benefit Fund: $3.7 billion.

Normal costs scheduled to be paid into the Benefit Fund to cover current year’s current employees’ retiree healthcare cost accruals: $3.775 billion.

Amortization payments scheduled to be made into the fund: $789 million.

Overall net loss for the year: $8.8 billion.

The math just doesn’t work to blame retiree healthcare contributions for the USPS’s losses. The amount they are recording on their P&L for retiree healthcare costs (which, again, they aren’t paying out in cash) — $4.564 billion — is only moderately more ($800 – $900 million, depending on rounding) than the amount that they would be paying out directly for pay-as-you-go benefits had the PAEA never been implemented.

MYTH: the USPS is required to fund pensions for the next 75 years, for workers who haven’t even been born.

“[T]he PAEA required the Postal Service to calculate all of its likely pension costs over the next 75 years, and then sock away enough money between 2007 and 2016 to cover most of them.” The Week, April 16, 2018.

FACT: the actuarial valuation methods used by the USPS are based only on accruals attributed to past service, no different than any other such valuation.

The Postal Service Retiree Health Benefit Fund (PSRHBF) is a USPS-specific fund, and its 10-K report specifies that it uses the “aggregate entry age normal acturarial cost method.” For pension benefits, employees participate in the CSRS and FERS general civil servant pensions, using the same method. In this method, yes, the actuary calculates the value of all benefits to be paid out in the future, due to past and future service, and then subtracts out the value of the future accruals, to calculate the actuarial liability. In addition, the Civil Service Retirement and Disability Fund calculates a projection of liabilities 75 years into the future in its annual report, but this does not mean that 75 years’ worth of future accruals are advance-funded, only that the long-term sustainability of the system is measured over a 75-year period.

Again, if you want more details, I encourage you to dig into my prior articles.

And all of this begs the question. No one is talking about the fact that retiree medical for the USPS is so high because its workers don’t (necessarily) participate in Medicare. In principle, they opted out of paying Medicare FICA taxes and need to suck it up and accept the consequences. But if Congress wants to fix this aspect of the USPS’s financing woes, a shift to Medicare and a reduction in USPS retiree healthcare benefits has surely got to be a key first step.

As always, you’re invited to comment at JaneTheActuary.com!

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