U.S. Postal Service Should Continue To Prefund Retiree Health Benefits

Read the full report as a PDF here.

Executive Summary

One of the biggest myths about the U.S. Postal Service (USPS) is that its financial problems would be largely eliminated if it did not have to “prefund,” i.e., set aside money and invest it, for its generous retiree health benefits program. Even comedian John Oliver spoke extensively about this during a May 2020 HBO segment.

Prefunding is synonymous with saving and investing for retirement. It is a responsible, time-tested, and essential practice to ensure today’s more than 600,000 postal employees and nearly 500,000 postal retirees receive low-cost, quality health care for years or even decades after they retire. As with quality pension plans for state government workers, money is put into a dedicated fund where the assets grow in value.

In the early 2000s, USPS, the Postal Regulatory Commission (PRC), and the U.S. Government Accountability Office (GAO) all recognized the need to protect the Postal Service’s retiree health benefits. The best way to do this, while also lowering costs, was to set aside money and invest it, or prefund. And Congress overwhelmingly agreed.

The 2006 Postal Accountability and Enhancement Act (PAEA) established a Retiree Health Benefits Fund (RHB Fund). It front-loaded payments through Fiscal Year 2016, to aggressively reduce a $54 billion unfunded liability.

Many falsely charge PAEA mandated pre-paying 75 years of benefits. Another common claim is that prefunding is part of a deliberate, nefarious plot to harm USPS so that it would be privatized. There is no basis to either claim, as this report documents.

Postal employees earn significant retiree health benefits for each year they work. As such, a portion of these benefits should be paid by USPS as they are earned and then invested. Yet, USPS has not contributed to the RHB Fund since 2010, defaulting on $51.9 billion, even though it has $14.4 billion in cash as of September 30, 2020.

Without USPS contributions to the RHB Fund, there is a high likelihood that benefits would be cut to postal employees and retirees; that taxpayers would have to assume a large amount of these costs; or both. Furthermore, cutting Postal Service retirees’ health benefits should be off limits. These retirees met their end of the deal by delivering mail and performing other vital services through snow, rain, heat, and gloom of night.

Eliminating USPS’s prefunding requirement would improve USPS’s balance sheet and reduce its annual net losses. Yet, it does not address USPS’s underlying fundamental financial challenges, which include a broken business model. As such, it might even breed a temporary sense of complacency and make things worse by postponing holistic postal reform.

In sum, the RHB Fund needs to be mended, not ended. USPS should make regular contributions to the Fund, though less than those required through Fiscal Year 2016. Like state pension funds for government workers, the funds should be invested in quality stocks and bonds. New actuarial approaches are also necessary given the defaults. These problems are eminently solvable.