Tad DeHaven

First, prefunding is always more transparent than pay-as-you-go. Prefunding shows the costs of commitments when they are made instead of ignoring the costs until years later. Second, pay-as-you-go with regard to deferred postal compensation is unfair because it transfers costs incurred for today’s mail service to future mail users or taxpayers. Third, pay-as-you-go is extremely risky for an organization like the Postal Service where the future obligations are huge while income is stagnating or declining. (It would not be dangerous if future obligations were small or if income were growing rapidly enough to easily pay future bills.) Fourth, a sometimes overlooked hazard of the pay-as-you-go method is that costs can appear deceptively low for many years and then suddenly climb as more workers retire and as retirees, with increasing age, need more medical care. In that vein, OPM estimated that if retiree health care financing had reverted to pay-as-you-go in 2010, the Postal Service’s pay-as-you-go expense would have been only $2.3 billion in 2010 but almost tripled to $6.4 billion by 2020. If PAEA had not moved toward prefunding, insolvency and the need for a massive taxpayer bailout would be virtually inevitable for USPS, although that might not have become clear to the public for several more years because of pay-as-you-go’s lack of transparency.

Michael says that the prefunding payment schedule should be stretched out given the USPS’s financial woes. However, the extended schedule should come with reforms that would “lower the extraordinary cost of USPS’s health care fringe benefit.” I think a common sense reform would be to eliminate retiree health care benefits for new employees. As I noted in an essay on the U.S. Postal Service, the health benefit is something that a decreasing number of private sector workers receive:

Opponents of pre-funding USPS retiree health benefits argue that private companies and the rest of the federal government are not legally required to do so. That is largely irrelevant. Retiree health care coverage is an increasingly rare perk in the private sector, and the federal government’s financial management is nothing to emulate. In 2008, only 17 percent of private sector workers were employed at a business that offered health benefits to Medicare-eligible retirees, down from 28 percent in 1997.

Tad DeHaven

Tad DeHaven is a budget analyst at the Cato Institute. Previously he was a deputy director of the Indiana Office of Management and Budget. DeHaven also worked as a budget policy advisor to Senators Jeff Sessions (R-AL) and Tom Coburn (R-OK).