GOP Presidential candidate Tim Pawlenty has raised the idea of privatizing the Postal Service. Though the postal service is far from being the largest government-handled service in the country, Pawlenty deserves credit for raising the issue. While his critics have countered that the agency receives no direct funding from the government, the postal service has been in the news for the ways in which its inefficiency and waste threaten taxpayers.
For instance, the WSJ discusses the possibility of a looming postal bailout:
The odds of a multibillion-dollar rescue package went way up this week when Postal Service management reported a $2.2 billion loss for the first quarter, more than 25% higher than last year despite the economic recovery. It now appears that the $15 billion line of credit the feds have offered USPS will be used up by the end of this year, with low odds on ever being paid back.
The Postal Service has increasingly faced financial problems due to structural drops in mail volume, as well as the rise in competition from delivery firms like UPS and FedEx. However, even shutting down the Post Service today would not insulate taxpayers from further payouts, given the nature of postal pensions, which are funded on a defined-contribution basis.
As the WSJ continues:
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.
Even worse is a bill co-sponsored by Senators Tom Carper of Delaware and Susan Collins of Maine, the Chairman and ranking Member on the postal oversight committee [e21 note: As the Wall Street Journal has corrected, only Susan Collins has introduced legislation]. They want to toss a $50 billion to $75 billion life raft to USPS by having the feds underwrite pension obligations for currently retired postal workers.
The challenge for the Postal Service leadership and lawmakers is to figure out how to adapt and also wind down some postal services in acknowledgement of the new digital age – all the while working to ensure that as few costs as possible are passed down to taxpayers. If the postal service’s long-run fundamentals don’t change, it will be unable to meet future cash flows to finance existing pension obligations and taxpayers will be on the hook.
The bill's advocates argue that proposed legislation will only fix pension "overpayments" and that the Postal Service has never received taxpayer money in the past. Yet the agency's financial status so far has rested on a legal monopoly that has allowed the Postal Service to offer substandard performance at inflated costs. Thus while it is true in the strictest sense that no taxpayer money has been appropriated for the Postal service, every user of postal services in the country has paid a price for the agency's poor functioning. And the problem lies not in the past, but in the future – when even monopoly profits may not be enough to cover spiraling pension and health costs.
Meanwhile, the "overpayments" issue merely compares the Postal Service with other government agencies, which have also been slow in properly accounting for future pension liabilities. Yet, rather than being an argument for why the Post Service should get a break, it merely highlights the state of affairs in public pensions, which are still largely based on a defined-benefit models that even most employees in the private sector do not enjoy.
A cover story in BusinessWeek highlights the role that union-driven labor costs play in the Postal Service’s financial problems:
Since 2007 the USPS has been unable to cover its annual budget, 80 percent of which goes to salaries and benefits. In contrast, 43 percent of FedEx's (FDX) budget and 61 percent of United Parcel Service's (UPS) pay go to employee-related expenses. Perhaps it's not surprising that the postal service's two primary rivals are more nimble. According to SJ Consulting Group, the USPS has more than a 15 percent share of the American express and ground-shipping market. FedEx has 32 percent, UPS 53 percent.
The USPS has historically placed the interests of its unions first. That hasn't changed. In March it reached a four-and-a-half-year agreement with the 250,000-member American Postal Workers Union, which represents mail clerks, drivers, mechanics, and custodians. The pact extends the no-layoff provision and provides a 3.5 percent raise for APWU members over the period of the contract, along with seven upcapped cost-of-living increases. The union is happy. "Despite the fact that the postal service is on the edge of insolvency, the union and management have reached an agreement that is a 'win-win' proposition," said APWU President Cliff Guffey on the union's website. A USPS spokeswoman said the agency agreed to the raise because it feared the decision would otherwise be made by an arbitrator who might be even more deferential to the union.
Sadly, many lawmakers apparently believe that it is the government’s responsibility to bail out every struggling but politically potent constituency. This sort of short-term political populism relies on its own sort of faulty accounting: offer promises today at the expense of future generations. It is exactly this sort of pandering that is driving Greece and many American states to fiscal crises today. While one postal-bailout is not enough to drive the federal government to bankruptcy, it is endemic of a broader problem that will only worsen as the population ages and more people demand the benefits they were promised.