Next up on the bailout list: The mailman? by Fortune Editors @FortuneMagazine May 18, 2011, 5:13 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons By James Hamilton, Econbrowser 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: 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. James D. Hamilton is Professor of Economics at the University of California, San Diego.