May 18, 2011
U.S. Postal Service pension funding
The challenge of meeting pension payments is starting to put a huge burden on the San Diego and California budgets, leading many of us to regret that more voices weren't raised in objection at the time these commitments were quietly made years ago. For that reason, discussion this week of pensions for U.S. postal workers got my attention.
Let me begin with a ground-level personal perspective. Twenty years ago, I used to get 2 or 3 items in each day's mail at work of varying degrees of importance. Today, there's essentially nothing I need to see that comes to me at UCSD via the U.S. Postal Service.
And it's not because I'm a less important guy than I used to be. To my great regret, I now get about 100 times the volume of correspondence that I did 20 years ago. But today it all comes electronically, whether it be letters of recommendation, papers and articles people want me to read, or invitations to secure vast sums from secret Nigerian bank accounts.
From my ground-level perspective, postal mail is a dying industry, at least as far as it's used in academia. So I had some concerns when the Wall Street Journal ran this strongly worded editorial on Saturday:
One thing we'll say about federal bailouts-- if you pay attention, you can usually see them coming a mile away. It was true of Fannie Mae and General Motors, and it's increasingly clear that the next candidate will be the U.S. Postal Service....
The Postal Service expects $42 billion in additional losses over the next four years. Mail volume and revenues have suffered what Postmaster General Patrick Donahoe concedes are "unprecedented declines" since 2006, with projections of another drop of 20 billion letters mailed by the end of the decade, down from 171 million this year, thanks to competition from electronic mail....
With their $15 billion line of credit from Treasury about to be exhausted, postal workers and management are now asking Congress to let them take a pass on $5.4 billion in legally required annual contributions to prepay for retirement health benefits.
While there is honest disagreement about how much should be set aside, the Postal Service and unions essentially want to operate the fund on a pay-as-you go basis-- i.e., the same model that has got states like California into fiscal trouble. As funding falls but benefits don't, pressure will rise to dump those health costs on taxpayers-- as General Motors and Chrysler did two years ago.
The position of the Postal Service appears to be that (1) it doesn't have the money to make the $5.4 billion in payments it is required by law to make this year in order to prefund its growth in pension liabilities, (2) it shouldn't have to make the payment, since it has already overpayed $75 billion for this purpose in what it describes as an inequitable arrangement, and (3) if the accumulated pension surplus were returned to the Postal Service, it could be better used to help fund health benefits for USPS employees.
The details for the latter arguments are contained in this 2010 report from the Office of Inspector General of the United States Postal Service. Here's what I learned from the report. In 1971, the Post Office Department of the U.S. government was given semi-independent status and became the U.S. Postal Service. The arrangement was that the federal government would pay pension costs for service through 1971 and the USPS would pay pension costs for service after 1971.
Postal workers are covered by a defined benefit plan, with payments based on salary in the last 3 years of service. One issue in dispute is who is responsible for increased pension costs for workers originally hired prior to 1971 but for whom subsequent pay increases that the USPS has granted since then have resulted in increased pension costs. A second question is the sum actuarially necessary to fund fully the existing pension liability.
I have not investigated details behind the latter argument. But given both the near-term cash flow problems and the deteriorating long-run fundamentals of this enterprise, my prior expectation would not have been that existing commitments to existing employees have been so adequately overfunded that there is $50 billion free just waiting to allocate to rising health costs as well.
Rather than play games with the debt ceiling, in which our representatives try to dodge responsibility for the excess of spending over revenues that they themselves have already passed into law, it would be refreshing to see a thoughtful discussion of exactly what future payments we're committing the federal government to with the legislation currently being proposed to address postal pension funding.
Posted by James Hamilton at May 18, 2011 08:12 AMdigg this | reddit
Wow, this guy claims to have seen the financial crisis a mile away. I wonder if he was short FNME (how did he know that congress was going to dramatically increase the $ size of a conforming mortgage so the CA, FL, NV banks could shove their loan portfolio off onto FNME?) Ok, he's not a good reporter, and I would guess he recently reported that the SS trust "took in" less than it paid out, which is true as long as your definition of "took in" excludes earned interest and capital gains. The bad reporting aside, there are issues with the paying for future obligations. The private sector is fast retreving all the goodies they gave us so we wouldn't be commie's and you should expect the public sector to be forced to follow. This will continue until the marketplace of ideas hears the people's voice saying "enough" and I expect that saying once will not be sufficent.
Posted by: Frank in midtown at May 18, 2011 08:55 AM
Where does the money come from for pensions to save for future payments? What is the effect on the economy today if more money is put aside for tomorrow?
Posted by: markg at May 18, 2011 09:04 AM
Dear Professor Hamilton,
Do you have any opinion on the GASB's intent to have government pension reporting comply more closely with private company reporting required by the FASB? Would better disclosure help prevent politicians from spending tax payers' money without regard for the consequences or for the taxpayer?
Posted by: AS at May 18, 2011 10:22 AM
Dear James D. Hamilton,
Regarding your article"U.S. Postal Service Pension Funding", I am baffled. Did you understand what you were reading in the Wall Street Journal or from other articles on this current subject. I fear not. The current problem among others that the U.S. Postal Service, Unions, congressional leaders, and most of the rest of the mailing industry is addressing is a mandated pre-payment for future retirees health care. This was part of the PAEA act of 2006 and requires the Postal Service to pay over $5 billion dollars by the end of their fiscal quarter. This burden has resulted in among other issues, the Postal Service running consistent deficets since FY 2007. Another part of this equation although a totally seperate issue is the overpayments by the Postal Service to the Office of Personnel Management to between $50-70 billion dollars since the early 1970's. According to The Office of Inspector General, Postal Regulatory Commission and two other independent accounting services. As of this point, the debate as to this looming problem does not pertain to the Postal Employees pensions from the Civil Service or Federal Retirement System. In my humble opinion, you have mangeaged to muddle the issue. This is also evident should you use the Wall Stree Journal or the Washington Post as crediable in their understanding of the issues that have been presented by all real intersted parties before both the House of Reperentatives and the U.S. Senate of the last few weeks. Thank You Ed l.
Posted by: Ed at May 18, 2011 10:24 AM
It's all principal-agent problems.
If politicians do not have an incentive to maximize economic growth subject to fiscal responsibility, they won't. It's as simple as that. Short-term expedience will beat long-term sustainability time and again.
Posted by: Steven Kopits at May 18, 2011 10:36 AM
And here's my outraged citizen comment of the day.
I drove across the Verrazano Bridge over the weekend. The Verrazano connects Staten Island to Brooklyn.
The toll was $13 (round-trip)! I kid you not. $13! If you make $13 an hour at, say, a fast food restaurant, then you have to pay one hour's wage to cross the bridge. Unbelievable.
Why is it so high? Maybe unions and politicians?
Posted by: Steven Kopits at May 18, 2011 10:43 AM
From the WSJ:
"Our customers are consolidating trips due to higher gas prices," said Wal-Mart U.S. head Bill Simon during the retailer's earnings conference call Tuesday. "One in five Wal-Mart moms list gasoline as a top expense behind housing and car payments."
Posted by: Steven Kopits at May 18, 2011 11:15 AM
This is off topic, but I thought I would mention that a recent survey of economics professors ranked this blog as one of their favorites. Paper here . Personally I think you were a little under-ranked, but congratulations and keep up the interesting work!
Posted by: Jeff at May 18, 2011 11:44 AM
Regarding Steven's Verrazano Bridge post, all of these bridges and tunnels are under some fiefdom authority and there are layers of wasteful positions that are there simply to provide nice salaries, job security, and pensions.
That said, the regular commuter would have an EZ Pass and would pay $9.60 round trip. Furthermore, Staten Island residents get tokens for $7.70 and a carpool Staten Island resident token is $2.70.
Posted by: tew at May 18, 2011 12:48 PM
What is the revenue maximizing level for the bridge? I would bet that it is substantially more than $13. The alternative would be to swim or to drive around until you got a free bridge (I think the cost of the Holland/Lincoln tunnels is almost the same, ditto GW and TapanZee bridges. I think you would ahve to go as far north as Newberg to find a free bridge. Any toll less than the revenue maximization level is effectively a subsidized rate. Who said that govt infrastructure spending cant have a positive ROI. Usually though the direct ROI is lower than it "should" be, and the population benefits. If the bridge were built by a private enterprise, you would expect them to set the toll at the revenue max point.
Posted by: Dirk at May 18, 2011 01:33 PM
It appears that a lot of posters did not read your article very well. Excellent observations! While the politicians argue on how much debt to throw out the front door they are loading us up throught the back door. They pretend to have control of spending while they commit billions or new dollars that will continue the debt explotion in the future.
This reminded me of your comments a couple of year ago on San Diego's pension problems. You were spot on then too.
Posted by: Ricardo at May 18, 2011 01:58 PM
Mail is not a 'dying industry'. FedEx and UPS are each massive, economic powerhouses, around the World. The Postal Service provides competitive, comparable services from a disadvantaged position. It has been struggling to get out from under the control of Congress for years. While their budget is funded by their revenues, those in charge cannot make decisions like close branches, layoff employees, add fuel surcharges to cover losses, etc...without the permission of Congress. Their leadership is severely handcuffed to alter anything integral. They are prohibited from making exactly the kinds of changes necessary. And since no legislator wants to be responsible for someone's neighborhood P.O. closing down, massive layoffs, reduced delivery, etc...it's financial problems have been neglected and left to swell like roadkill in the Sun.
Posted by: Don at May 18, 2011 05:05 PM
I'm with Clark Howard on this. Sell it off...privatize it. The U.S. postal service is incapable of functioning without losses. Our communication system ( and numerous others) has fundamentally changed. Let the free market handle physical mail delivery. Long-term benefit packages need to be re-analyzed, pension systems do not work. Perpetual dependance on growth models and consumerism will suck the world dry. Our notions of retirement are outdated. Our leadership and vision must adopt or we will forever manage by crisis and our children/grandchildren will inherit the earth...but one that is irreparable without ongoing painful correction of our errs or ultimately extinction.
Posted by: Chachie at May 18, 2011 05:34 PM
The only mail I get outside of Junk is bills. They could cut deliveries to every other day as far as I am concerned.
Posted by: Walter Sobchak at May 18, 2011 08:26 PM
I don't know about the pension issue or the health payment issue highlighted in the comments. I do know that blaming the post office for running losses when it is not allowed to act like a business is just nuts. A sensible business would charge more to deliver mail to rural areas. A sensible business would charge more where there is less volume because they would need to maintain an infrastructure for fewer clients and fewer revenue producing pieces of mail. The post office can't and one irony is that nearly all the areas that in effect are subsidized by the taxpayers and by denser regions, those which are charged too little by business standards, vote for the GOP. I've argued for years that the post office should be allowed to charge rural residents more to cover costs. Not popular politically because the GOP wants subsidies for its voters, not for Democratic voters.
Posted by: jonathan at May 18, 2011 09:21 PM
..."The challenge of meeting pension payments is starting to put a huge burden on the San Diego and California budgets, leading many of us to regret that more voices weren't raised in objection at the time these commitments were quietly made years ago."
More voices? They were legion. Every pension bill etc for the last 30 years, even in San Francisco, had 30-40% against. One party rule guaranteed passage. If not the courts would overthrow unexpected results. Every dime of current debt was pre planned and approved with full knowledge of the possible outcomes. Embedded in virtually all the bills was the proviso that taxpayers would, by law, be required to make up any short falls. We are not in debt by accident.
Posted by: Patrick at May 19, 2011 04:49 AM
The GELM, Government Export Land Model*
The link to an interesting column by Meredith Whitney is shown below.
I am proposing something called the GELM--Government Export Land Model. The premise is that as governments see flat to declining revenue, versus generally flat to increasing fixed expenses, especially for items like grossly underfunded pension plans, the net effect is that revenue "exported" out of government will fall at an accelerating rate of decline (assuming a requirement for a balanced budget, which is generally true for local & state governments in the US).
For example, for the sake of argument, let's assume that in Government Land (GL), total overhead costs (debt service, salaries, benefits, etc.), account for 50% of tax revenue (at peak tax revenue). And let's assume that tax revenue falls at a rapid clip, 5%/year. Let's further assume that GL cuts staff, but because of rising pension costs, total overhead costs stay flat.
Let's assume tax revenue, at peak, of $100 million, with overhead of $50 million at peak. So, $50 million is "exported" out of government in the form of services and benefits to citizens, at peak tax revenue.
So, tax revenue falls at 5%/year, while overhead expenditures stay flat, even as government employment declines. The net result is that revenue "exported" out of government would go from the peak rate of $50 million to zero in 14 years, when all tax revenue would theoretically go to government overhead costs.
Based on the foregoing, tax revenue over the decline period would fall at 5%/year, while "Net Exports" out of government would fall at an accelerating rate, with an overall long term "Net Export" decline rate of 24%/year (starting out more slowly and accelerating with time).
It seems to me that the GELM math is quite similar to ELM math, to-wit, given a decline in tax revenue (and assuming balanced budget requirement), unless government overhead costs are cut at the same rate as, or at a rate faster than, the rate of decline in tax revenue, then the "net export" decline rate (the rate of decline in government services and payments to citizens) will exceed the rate of decline in tax revenue, and the net export decline rate will accelerate with time.
The Hidden State Financial Crisis, by Meredith Whitney
“What concerned us the most was the fact that fixed debt-service costs are increasingly crowding out state monies for essential services. For example, New Jersey's ratio of total tax-supported state obligations to gross state product is over 30%, and the fixed costs to service those obligations eat up 16% of the total budget. Even these numbers are skewed, because they represent only the bare minimum paid into funding pension and retirement plans. We calculate that if New Jersey were to pay the actuarially recommended contribution, fixed costs would absorb 37% of the budget. New Jersey is not alone.
The real issue here is the enormous over-leveraging of taxpayer-supported obligations at a time when taxpayers are already paying more and receiving less. In the states most affected by skyrocketing debt and fiscal imbalances, social services continue to be cut the most. Taxpayers have the ultimate voting right—with their feet. Corporations are relocating, or at a minimum moving large portions of their businesses to more tax-friendly states.”
*For an explanation of "Net Export Math," do a Google Search for: Peak Oil Versus Peak Exports
Posted by: Jeffrey J. Brown at May 19, 2011 05:24 AM
How do you feel about private corporations being allowed to dump their pensions on the taxpayers via the PBGC in bankruptcy?
Posted by: ComradeAnon at May 19, 2011 06:15 AM
Ed and Don bring very salient arguments about the budget and pension funding problems at the USPS. The bigger problem, pension liabilities without a sufficient investment Rate of Return plague government and private institutions. Its not going to be pretty as the US economy deleverages over the next 20 years, paying-down its $52 Trillion credit bubble.
Think of QE as a method to hype-up the securities market and a fig leaf on pension funding. The extra cash also comes in handy in purchasing commodities on the world market, or higher yielding investments in emerging economies.
Posted by: MarkS at May 19, 2011 06:47 AM
I'd like to focus on the reasons many people acquiesced to these huge pension guarantees at the time -- not only for postal workers but all municipal and other government workers. My own opinion is that this was simply vote buying by all who agreed to it, either passively or actively. The stated reason was that government had to pay higher wages and pensions to attract better quality workers. We know that was totally disingenuous. The politicians saw an easy way to bribe workers for votes. Liberals saw it as an easy way to expand the army of public workers who would continue to vote for Democrats which is a direct vote for more government. Now, I think the response should be to gut the programs. The Post Office should not get any further money. I don't care if they have to cut delivery to once per week. Most of the mail I receive is 3rd class junk which is an environmental disaster because of the energy and chemicals required to generate all of that garbage. Close down the post office and people will quickly find another way. They already have!
Posted by: Jolly Rancher at May 19, 2011 07:21 AM
A few years back we eliminated retiree medical benefits. Poof...gone. We gave people a tool they could use to estimate how much more they would need to save in order to pay expected costs. That came up to about $230,000 for me and my spouse. Given that the average 401K balance for a 50 something is exactly that, it works out nice, doesn't it?
The point being is that this is happening all over. I love the post office personally and I love my mail carriers. My Netflix dvd's have never ever been late. I can send a box of stuff cross country for less than $20. etc etc. But really you can't pay for medical care in this country. It's just simply too expensive for all but the top 5 or 10%. The users of the service can't pay enough to provide lifetime medical care to post office employees. So it should be eliminated.
Posted by: anon ii at May 19, 2011 07:43 AM
>it would be refreshing to see a thoughtful discussion of exactly what future payments we're committing the federal government to
Everyone got on his or her favorite soapbox rather than getting to the meat of the issue, which is that we are at a decision point with postal pension funding.
That said, I will get on mine. At each step in the game the GOP gets a bite at the apple. The last temporary spending bill was negotiated under a gun. After it was over the two parties went out and politicked and got their voters' responses. Now they are back at it again. Each negotiation is really done with an eye to testing the popularity of the two positions with the voters.
I am not an economist but it seems that the negotiations are an iterative process that has some relevance to economics. The outcome of one round establishes the value of a particular stance to the voters, whose votes select one party's candidate over another's.
The idea that Congress has already committed to spending overlooks the fact that politicians never really commit to anything. A good way of synthesizing this statement with what I wrote above is to watch this video.
Students of history will remember what happened to Congress' commitment afterward.
Posted by: colonelmoore at May 19, 2011 08:05 AM
1) "Today, there's essentially nothing I need to see that comes to me at UCSD via the U.S. Postal Service."
Its worse than that. Most of the mail I receive goes straight into the trash - unwanted retail and political spam. In effect, when the government bails out the post office, it is taking my money to subsidize a somebody else's effort to harrass me.
2) "Postal workers are covered by a defined benefit plan, with payments based on salary in the last 3 years of service. "
If you put $100 on the S&P500 index 12 years ago, today it would be worth... $100.
Todays defined benefit plans, including the POs, is designed to take in all of the gains when the market is good, and pass on all of the losses when the market is bad.
By contrast the 100pct invested all the time, capped tax exemption on inputs, no withdrawals without penalty, forced withdrawals at a certain age, no bailout 401ks of private industry is designed to convert gains into fund management skim.
Not proposing a solution, whining a bit.
Posted by: KevinM at May 19, 2011 08:36 AM
The rules for the Postal Service were changed in 2006 so that they are forced to pre-pay for future retiree healthcare. This is not required by any business or any other government agency. So the act saddled the USPS with a huge additional financial burden and when they complain it's detractors say, "See? Government can't do anything right."
People love to say that government should be run like a business. Well, then change the rules for the USPS so that it can handle their finances just like Fed Ex or UPS.
Posted by: BH in MA at May 19, 2011 09:02 AM
Pension funds invest a good portion of their funds in Treasury Securities (govt debt). If the pension funds are required to be fully funded the demand for those securities goes up, driving the yields (interest rates) down. With lower yields, the pensions have to invest more to make up for the loss of income due to the lower yields. The money used by pensions to buy Treasury Securities is removed from the income of business or workers. This is a loss to aggregate demand causing the economy to slow.
A few weeks ago JDH said the govt should only run a deficit of 3% of GDP. I think this is wrong because there will be periods when the private sector desires to buy more Treasury Securities to fund savings requirements. The only way to satisfy both the savings, and the spending needed to support aggregate demand is for the govt to run a deficit. If this exceeds 3% so be it. And we have not even considered the fact that foriegners like to save in US dollars. Your 3% is dead wrong JDH. And BTW, I am willing to bet the debt/gdp ratio will fall as the baby boomers retire because they will be done saving and will be spending.
Posted by: markg at May 19, 2011 09:25 AM
Following Jeffrey's point, there is certainly a risk that states will follow auto makers into a pension/health care death spiral. High pension costs lead to high taxes or lower services. People move out (very much a trend here in New Jersey, with Pennsylvania only 20 min. away).
As a result, the unit burden (taxes per citizen) must increase to meet obligations, leading to more defections across state lines, until the system becomes untenable.
But it's not quite that simple, because most of these taxes are property taxes. Thus, property taxes become a greater portion of the residential burden over time (they rise relative to mortgage payments). This, in turn, puts downward pressure on house and land values, which in turn acts to reduce new construction, which in turn sustains property values.
So go figure. But it looks to lead to, at best, stagnation of population, and worst, secular population decline.
It's not hard to understand how such fiscal irresponsibility manifests itself as anger towards unions.
Posted by: Steven Kopits at May 19, 2011 10:51 AM
Why, such a reasoanble suggestion! Academia? Is ther a role for Academia in Washington? A bill has been introduced to allow th USPS to cut to five day delivery (wow, an actual "business decision"), to reduce or eliminate pre-funding of retiree healthcare benefits (bailout), or to allow the USPS to borrow more money (avoidance behavior)? Hmmm. I am guessing they will just borrow more money.
Posted by: EarlyW at May 19, 2011 10:54 AM
Fed exiting the T auction market will cause rate hikes, drive down the dollar and create the inflationary presure from commodoties priced in dollars, ie Oil and it will flow from that point. EMH in is purest form would correct these things, but it does not work with current market strutures. Pricing dislocations need to find a bottom for price stability. As I ramble, one final point, weve not economic drivers to absobe inflation, ie techology, productivity ect. Were do we get the GDP to deal with the inflation?
Posted by: Rady at May 19, 2011 12:36 PM
Sounds backwards. Doesn't the fed's exit reduce the money supply by removing debt monetization?
I agree that rates should go up, but disagree about commodities like oil.
Posted by: KevinM at May 19, 2011 04:31 PM
My mailman is a lazy slug who looks like he is strung out on rhino tranqs. His eyes are always bloodshot, he slurs his words, he rarely shaves and he moves just slightly faster than a snail with scoliosis. I see him every day at Frankie's Pizza, snarfing down two massive slices of pepperoni pizza and then he disappears into the back of his mail truck, presumably for a two hour siesta. To call him lazy is an insult to the word lazy. Is it any wonder they are broke? Sheesh.....
Posted by: Jeff Olson at May 20, 2011 10:46 AM
James, I'm not familiar with your writing about San Diego, but I am familiar with some of the problems that happened there, and in Orange County, and IIRC those were due to massive under-funding of future liabilities. We're suffering from the same thing here in New Jersey, where fiscal geniuses like Whitman and Christie have consistently refused to fund pension obligations while simultaneously complaining about the ballooning funding gaps. The USPS, by contrast, seems to have mechanisms in place that ensure at least some responsibility for funding the obligations that have been set.
None of this detracts from your point about the wisdom of agreeing to those obligations in the first place (Lowenstein's "While America Aged" is particularly good on this point), but I'm surprised to see you imply that all of these pension problems are of a kind, when they don't appear to be.
Posted by: Anchard at May 23, 2011 01:57 AM
So the USPS is the only agency required to fully fund pension obligations? This is not a bad thing.
Posted by: Joe at May 23, 2011 06:40 AM
I am a Post Office Retiree and after 33 years working there I can assure the public that if the Post Office would start at the top of the list of their management departments and reduce the dead weight they would start saving the money they waste. There is a need for them to adjust the way they process the mail starting with listening to those who are doing the actual work. Doing something on paper doesn't always work in real time. Stop pushing the way things are done with the attitude I'm the boss and I know everything. Get the employees involved. Cut out Saturday Delivery. As to the penion requirements, if its not broke don't fix it. Keep your hands out of that fund its there for a purpose not to be used for something else.
Posted by: Jim at August 6, 2011 12:49 PM