OIG Report: Update for Measuring Pension and Retiree Health Benefits Liabilities

Background

The U.S. Postal Service provides pension and health insurance benefits to its retirees. Postal Service employees participate in the Civil Service Retirement System (CSRS) or Federal Employees Retirement System (FERS) pension programs. The Office of Personnel Management (OPM) administers these programs, including projecting future CSRS and FERS assets and liabilities for the federal government and Postal Service.

The OPM also administers the Postal Service Retiree Health Benefits Fund, which was established by the Postal Accountability and Enhancement Act of 2006 (PAEA). This statute required the Postal Service to prefund retiree health benefits by making payments of about $5.6 billion annually to the health benefits fund from fiscal year (FY) 2007 through FY 2016. However, beginning in FY 2012, the Postal Service defaulted on the required payments.

The OPM’s pensions and retiree health benefits projections use federal employee-wide workforce demographic assumptions, such as mortality rates and retirement age, and economic assumptions, such as inflation rates, wage growth, and earnings from invested assets. In December 2016, the OPM proposed regulations that would allow use of Postal Service-specific demographic assumptions for calculating its FERS liability, provided certain conditions are met.

The Postal Service’s financial challenges are well publicized. From FY 2007 to FY 2016, it lost $62.4 billion, with $54.8 billion of that total related to prefunding retiree health care. Furthermore, the Postal Service believes it is unlikely to make all legally required payments in FY 2017, based on availability of cash and its inability to borrow.

In an effort to reduce the retiree health benefits liability, the Postal Service has made proposals which have been incorporated into pending legislation that included mandatory enrollment in Medicare by Postal Service retirees in order to participate in the Federal Employees Health Benefits program. Since 1983, the Postal Service and its employees have contributed over $29 billion to Medicare. The proposals also include savings with respect to prescription drug benefits under Medicare.

As of the end of FY 2016, the OPM projected the Postal Service’s share of assets in the CSRS at $174.4 billion and the liability at $191.9 billion. For the FERS, OPM projected $112.1 billion in assets and a $115.9 billion liability. As of the end of FY 2016, assets in the Postal Service Retiree Health Benefits Fund were $51.9 billion, and the OPM calculated the retiree health benefits liability at $104.0 billion. The assets in these retirement liability accounts totaled $338.4 billion, and the liabilities totaled $411.8 billion, resulting in these liabilities funded at 82.2 percent.

Between FY 2010 and FY 2014, the Postal Service’s pension funding position shifted substantially. In FY 2010, assets exceeded liabilities by $1.6 billion (CSRS) and $10.9 billion (FERS); however, in FY 2014, liabilities exceeded assets by $19.4 billion (CSRS) and $3.6 billion (FERS).

Our objective was to update and assess the impact of changes in assumptions on Postal Service retirement liabilities, in order to evaluate the reasons for the significant reduction in its pension funding position, and to update results produced through use of Postal Service specific assumptions.

This report updates three reports the Office of Inspector General previously issued in FY 2013 regarding Postal Service-specific assumptions and their effect on the CSRS, FERS, and retiree health benefits liabilities.

What the OIG Found

The OPM calculates the Postal Service’s share of the CSRS, FERS, and retiree health benefits liabilities using demographic and economic assumptions from the federal employee workforce. However, using Postal Service-specific demographic and economic assumptions lowers these liabilities by $10.2 billion.

Between FY 2010 and FY 2014, the funded status of the CSRS and FERS pension plans changed from a surplus to a deficit primarily due to changes in assumptions for the interest rate and the cost of living allowances, and lower than expected investment returns on pension plan assets.

Further, the PAEA requires the Postal Service to liquidate the projected FY 2016 unfunded CSRS liability totaling $17.5 billion by FY 2043. The OPM projected the Postal Service’s first annual installment to be $1.2 billion. The Postal Service estimates it may be required to pay the first installment as soon as FY 2017. However, the wording of the statute appears to require the first payment to be made in FY 2018. This matter is currently under review by the U.S. Department of Justice Office of Legal Counsel to confirm whether, based on its interpretation of the statute, the initial payment is due from the Postal Service beginning in FY 2017 or FY 2018.

What the OIG Recommended

Although the monetary impact associated with these issues is not in the direct control of Postal Service management, we recommended management continue to work with Congress to enact legislation requiring the OPM to use Postal Service assumptions in preparing pension and retiree health benefits liabilities and Medicare participation.

Since the Office of Legal Counsel will determine when the Postal Service should make its first payment for the unfunded CSRS liability, we are not making a recommendation.

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Source: USPS Office of Inspector General

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