Comment by jxf | Hacker News Reader

Comment by jxf | Hacker News Reader

From the article:

> The Amazon contract will be a much-needed financial boost to the Postal Service, which continues to bleed red ink as more Americans eschew "snail mail" in favor of email, instant messaging and social networks. The agency, which said it expects to lose around $6 billion this year, has been closing locations and has proposed ceasing Saturday delivery of many items to cut costs.

But the USPS is, operationally speaking, profitable; it makes about $400M in operating profit per year. So where does the $6B loss come from? It turns out that the overwhelming chunk of USPS expenses are due to a 2006 Congressional mandate that forces the agency to prepay for 75 years of benefits.

In other words, Congress believes that a hypothetical 30-year-old USPS employee's benefit costs need to be fully covered at current levels for 75 years, when the employee would then be 105. Likewise, a retiring 60-year-old USPS employee's pension benefits need to be fully covered for 75 years out -- when the retiree would then be 135 years old.

So, if USPS wants to hire, say, a new mail carrier whose benefits are worth (say) $20,000/year, they must immediately pay $1.5M into the fund (it's actually higher than that because there is a discount factor applied to account for interest and rising health care costs). Imagine if your startup or small business were held to the same requirements, and any reasonable person can see this is insanity.

Here's a WaPo article covering the problem in more detail:

http://www.washingtonpost.com/blogs/federal-eye/wp/2013/02/0...

So where does the $6B loss come from? It turns out that the overwhelming chunk of USPS expenses are due to a 2006 Congressional mandate that forces the agency to prepay for 75 years of benefits.

So do all private sector businesses. You can't promise employees $X in future benefits without putting $X into a pension fund. This requirement is uncommon in government, which is why many municipalities have unfunded pension obligations, but it's completely reasonable. The scary fact is that we only require the USPS to do this.

You are also misrepresenting the 75 year time horizon. The USPS is required to make the following (wildly oversimplified) spreadsheet:

    year    #living employees   # earned costs/employee
    2014       1000000            50000
    2015        900000            51000
    etc

The pension fund needs to have SUM(column B x column C) dollars in it (again, wildly oversimplified - it's actually the Present Value of Future Benefits). The 75 year requirement means the spreadsheet must have 75 rows. This prevents the fund from cheating by cutting off the calculation early and failing to account for payments they promised to make. Changing 75 years to 100 years wouldn't change anything.

The number "earned costs/employee" is the fraction of the pension costs that have already vested. I.e., if the employee has earned a pension of $100/month so far, but will have earned a pension of $5000/month at retirement, their earned costs are $100/month, not $5000/month.

This is the same calculation that ERISA requires of all private sector companies.

(Certain grandfathered companies in the private sector are also allowed to escape ERISA, and this will be a problem if any of them go out of business.)

My memory from previously looking at this is that you're completely right. But if so, news coverage like that WaPo article are egregiously intellectually dishonest (even if they don't technically lie).

Is there a counter-argument to what you've written that smart people on the other side will offer even if it's not convincing? The only one I could imagine is "The federal government has a special economic status so it doesn't need to fund the future costs it commits to, a la social security". But that's pretty weak.

I don't know of a good argument against applying ERISA to the government. Nor do I know a good argument against fixing all the various ERISA loopholes (e.g., certain private sector post-retirement health care benefits are excluded from ERISA). But I'd also love to hear one.

As for the "egregiously intellectually dishonest" WaPo, I'd simply point out that most reporters are innumerate. Full stop. If you give them an explanation like what I just did, their eyes glaze over and they either parrot what I just said (if their intuition/opinions agree with it) or go find an opposing expert (if they dislike my conclusion). For other examples of this, go read financial crisis reporting - "an evil vampire squid just ate a black swan and then pooped toxic waste onto innocent homeowners."

The Problem isn't the prefunding, it's the suddenly being expected to prefund for half a million employees in 10 years. A private company accrues those costs one employee at a time over several decades.

There is the question of whether, in 2017 once this has been sorted out, what (if anything) they'll change to remain profitable with the increased employee costs going forward but they were quite profitable before this happened so I don't see too much of an issue.

Although the federal government DOES HAVE special economic status so I'm not sure how you think that's particularly weak unless you think reality is pretty weak.

The USPS was not actually profitable. They simply seemed profitable because they were hiding the cost of retirement benefits. Forcing them to prefund is nothing more than forcing them to acknowledge the debts they already accrued. If that tips them into the red, they were not profitable before. They were simply pretending to be profitable via accounting tricks.

$100 in revenue - $75 in costs - $50 in off balance sheet debt is not profitable.

The special economic status of the federal government simply means that the taxpayer is on the hook for the USPS's hidden debts. No one disputes this. What's under dispute is whether the USPS should be allowed to incur hidden debts on behalf of the federal government (PAYGO accounting), or whether their debt should be transparently included in the federal debt (ERISA accounting).

If anything, it's the change from not-funding to pre-funding. It's not new money that has to be conjured from thin air, it's money that is already owed.

USPS is NOT put in a worse situation than private companies. It had a privilege that put it in a much, much better situation revoked.

The fact that future governments can (probably) be relied on to make good on promises made today is a "weak argument" for just kicking the can down the road instead of funding the liability immediately.

In 2017, USPS's costs will go down, significantly, because they no longer have the backlog of pensions to fund, they will just to funding pensions on an ongoing bases. Exactly like private companies. At that time, USPS will be in a situation where it can be reformed, because it no longer carries around a glut of unfunded liabilities that will be dumped in the government's lap if something goes belly up.

The weakness comes not from the unreality of the special economic status, but from the improbability that that status actually changes whether it's a good idea.

"This is the same calculation that ERISA requires of all private sector companies."

Not quite. It should be "all private sector companies that offer pensions." That's only about 18% of private employers as of 2012. See http://www.bls.gov/opub/mlr/2012/12/art1full.pdf

Even private sector companies with defined contribution plans need to do this calculation. It's just trivially easy for them - the calculation amounts to "did the bank transfer into the 401k happen on schedule?"

Good point!

Nope, not even close. GM for example has a lot of unfunded pension obligations. Which is one of the reasons for the auto bailout if the US auto industry failed a lot of pensioners would see a huge drop in there monthly pension checks.

Above and beyond that companies set aside money each year for each working employee which is supposed to cover the majority of there pension they don't need to set asside the full cost on day one like the USPS.

How is my post wrong? From my post: (Certain grandfathered companies in the private sector are also allowed to escape ERISA, and this will be a problem if any of them go out of business.)

You are simply incorrect that the USPS needs to pay for an employee's pension on day one. They contribute according to a vesting schedule, same as any private sector company not grandfathered.

It's only in their projections that they must include full costs. Unlike many other agencies, the USPS can't tell Congress that a program will cost $X over the next 10 years, where $X excludes the cost of employee pensions.

Plans may be underfunded if fully funding the plan represents a major threat to the business. The net effect of which is plans can easily become significantly underfunded without being grandfathered in.

(c) Variance from minimum funding standards (1) Waiver in case of business hardship (A) In general If— (i) an employer is (or in the case of a multiemployer plan, 10 percent or more of the number of employers contributing to or under the plan are) unable to satisfy the minimum funding standard for a plan year without temporary substantial business hardship (substantial business hardship in the case of a multiemployer plan), and (ii) application of the standard would be adverse to the interests of plan participants in the aggregate, the Secretary of the Treasury may, subject to subparagraph (C), waive the requirements of subsection (a) for such year with respect to all or any portion of the minimum funding standard. The Secretary of the Treasury shall not waive the minimum funding standard with respect to a plan for more than 3 of any 15 (5 of any 15 in the case of a multiemployer plan) consecutive plan years.

You are wrong because the USPS is required to fully pre-fund all of its pension obligations. It does not pre-fund based on a vesting schedule, it must prefund each obligation all at once. That is why the prefunding obligation is always brought up when discussing the USPS's finances--it is a unique requirement that is not shared by any other entity, public or private.

You are probably misunderstanding the pre-funding schedule. Beginning in 2006, the USPS was obligated to make pre-funding payments with the goal of fully pre-funding 75 years worth of pensions by 2017. See the linked WaPo article, which explicitly states "Congress passed a statute in 2006 requiring the early payment of 75 years worth of retiree benefits within 10 years. " (This is not the same as vesting, because the pre-funding obligation is not tied to the vesting of any particular group of beneficiaries' benefits.)

More specifically, see section 801, et. al., for the specific language of the Postal Accountability and Enhancement Act fo 2006 which creates the silly requirement.

I don't care what some innumerate reporter at the WaPo wrote.

According to the actual law, what must be fully funded is the "actuarial present value of all future benefits payable from the Fund." What this means is that if an employee's pension has 50% vested, their "future benefits payable from the Fund" are 50% of their pension. The USPS is then obligated to put 50% of the NPV of their pension into the fund by 2017.

https://www.govtrack.us/congress/bills/109/hr6407/text

It's explicitly stated 5 times it should comport with "generally accepted actuarial practices and principles", which rules out all the insanity people seem to be attributing to this law.

Yes, I know what the text of the bill states, which is why I referenced it in earlier comments. More importantly, you yourself have posted the relevant language. The "acturial present value" part of the quoted phrase is what must comport with generally accepted actuarial practices. The problem is that "all future benefits payable" is by its express language not limited to vested benefits. You need to read the entire code section, not just little snippets.

I'm very much enjoying this discussion and I hope you guys can find a definitive statement about what the bill entails. (I find the language you have both quoted from the bill to be too vague to my uncertified ear to make a decision.)

Is your claim that the postal service must pre-fund unvested benefits at the day the employee is hired? That is, is that how you think "future benefits payable" is being interpretted? Because what's definitely not true is that the postal service is being required to fund un-hired (or unborn) employees. See this article, which has quotes from the Congressional Research Service.

http://www.cnbc.com/id/45018432

>> Which is one of the reasons for the auto bailout if the US auto industry failed a lot of pensioners would see a huge drop in there monthly pension checks

Most of them already have.

It should be noted that post-ERISA, the preferred alternative to promising $X in future benefits without putting $X into a fund is to put in $X, but then get the money back on the backend when some private equity company takes the company through bankruptcy to reduce its pension liabilities. Private sector pension plans are overall in much better shape than public sector ones, but that's not saying all that much.

No organization fully funds a pension 75 years out.

Google the definition of "fully funded". Any organization complying with ERISA is funding a pension not only for 75 years, but for 75 billion years.

Only defined contribution pension plans are required to be fully funded...because of the nature of the pension (the plan guarantees the amount input but not the benefits available when the worker retires). A defined benefit plan can be fully funded, but ERISA does not require this--indeed, few defined-benefit pension plans, public or private, are fully funded. Moreover, fully funded in this context only refers to the funding of vested benefits. The USPS is required to pre-fund all benefits for current and past employees, even those benefits which have not yet vested.

Also, please note that in other posts you are conflating 401-k contributions with pension contributions. They are not even remotely the same thing.

I'll just pretend I don't know about the dozens of times pensions were withdrawn by big corporations because they can. Just Google "pensions gone" or similar queries, if you're really that clueless.

After reading through the entire thread, I can see where your misunderstanding arises.

You are referring only to the payment of vested pension benefits. In this regard, you are correct--ERISA generally requires companies to fully fund vested pension benefits. Pension plan payments for vested benefits are not "pre-funding payments" since the liability has already accrued. A "pre-funding payment" would be a payment for pension benefits for which the liability has not yet arisen, i.e., for unvested pension benefits.

That is what is significant about the USPS--it is required to pre-fund its pension liabilities for its current and past employees, including for those benefits that have not yet vested and which would, absent the specific Congressional mandate not be required to be funded under ERISA.

The USPS is not required to prefund pensions for employees it hasn't hired yet, but you're the only one on the thread arguing that.

Here is the law. What portion of the law requires them to pay for benefits which have not vested?

https://www.govtrack.us/congress/bills/109/hr6407/text

Your interpretation is certainly not "in accordance with generally accepted actuarial practices and principles" as the law demands.

This is not true. The USPS loses billions every year before pre-funding. However, pre-funding pushes them against their statutory debt limit.

You can see in their annual report that they expect losses of up to $20 billion annually even after 2017 (when pre-funding catchup ends) and their plan to eliminate pre-funding would only save about $8 billion per year -- and do nothing to address that the USPS will not be able to pay pensions since they lose so much money.

I urge you to read primary sources. The USPS' annual report is an easy-to-understand slide deck that explains everything very well. http://about.usps.com/strategic-planning/five-year-business-... Please read it before the next time you say something about this issue.

I leafed through the 37 pages. If I understand correctly, the losses are projected only if they don't partake in some initiatives. If they actually follow their plans and mail volume is in the upper 2 (of 4) projections, they make money.

Correct. I wasn't saying that they have to be unprofitable going forward, just that the pre-funding doesn't entirely explain the losses.

I think it's a sensible document and it shows the USPS understands their situation and is willing to remain solvent in a humane and useful way.

But the pre-funding, which what I can determine, is rare both in public and private sector, brings them from profit to loss.

The USPS pension obligations are around 100% funded (has been overfunded at 105% in the past; may still be the case.)

The average private company funds its pensions at about 80%. It's supposed to be a complete funding when interest rate of investments is factored and the average used to be about 90%. There are (questionable) accounting tricks that private companies can use to underfund pensions that are not available to the USPS because of the way their Congressional mandate is written, and because of the enormous amount of public scrutiny.

So, to bring the USPS in line with what is required of the pensions of private companies, they would reduce their obligations by 10-20% at most. They would still have the same problems.

Public pensions don't have funding requirements. This is a disaster for millions of workers since they won't get their pensions. It's not a good idea to rely on perpetually increasing government revenue without any kind of savings in reserve.

That said, eventually, the USPS will need to reduce pension payments in order to survive if their other initiatives fail, or they will have to obtain direct funding from Congress. If they are required to pre-fund to the end, then retirees will benefit at the expense of current employees. If they are allowed to drop pre-funding and move to the public pension model, then retirees will suffer for the benefit of current employees.

But we're talking about health care, not pensions (similar but different).

Even so, the bill seems designed to make them fail.

Untrue.

Even if you took away the requirement to fund their retirement/pensions the Post Office would have lost nearly five billion dollars last year.

The pension funding is a common misdirection that is brought up far too often in discussions about the Post Office.

The USPS problems are

1) Congress, how many "corporations" have 535+ people to tell them how to run their operation. Congress routinely prevents the closing of obsolete Post Offices and Sorting facilities. 2) People simply do not use mail, dropping more than a third of the letters shipped in the last six years 3) Businesses are also dropping the amount of mailings made.

In 2006, the unfunded liability of the USPS was nearly 75 billion dollars. Who should be funding it? Certainly not the public. The law requires the USPS to put aside 5 to 6 billion a year. The issue that came up was, mail use plummeted.

When I first heard about the absurd benefits-prepayment scheme, I could swear I read that even USPS employees were against it because they knew what repercussions it would have. I don't have a citation for that unfortunately.

The older ones may have been, because they would have reaped the benefits. But sooner or later, when the taxpayers would have started getting hit with astronomical bills for keeping USPS retirees alive, someone would have had to pay the price.

See Detroit's pension retirees. The older retirees took advantage of the nice pension, and now the younger retirees are going to have to have their benefits cut because there is no one left for Detroit to tax.

As they say lies,lies, statistics and pension scheme forecasts :-)

I had an off the record briefing about Hermes (the uk's largest pension fund) for some reason the government makes pension funds appear to have major short falls by assuming that magically all the members will suddenly start drawing their benefits all at once.

On more reasonable forecasts the scheme was sightly under on more positive estimation it was actually in surplus.

Cynics might think that FS pensions are being made artificially expensive to allow employers to kill of the schemes.

Actually, at least in the US, it's the opposite. The US government requires private organizations to abide by strict funding standards to ensure their retirees get their promised benefits, via laws like ERISA and PPA of 2006.

On the other hand, government entities don't have to abide by ANY laws regarding funding for future benefits, so the politicians and union leaders/elders promise higher and better benefits to get the votes, while taxpayers get shafted when the bill comes due. It's ridiculous to promise full retiree healthcare (even the US government doesn't offer it to its citizens). That is why when Congress required USPS to prefund the benefits, it became an issue for their budget. Because when benefits actually get accounted for, and you start setting money aside, you realize how stupid it is to offer someone full retiree medical benefits.

Ah yes but are the strict funding requirements fiddled or not?

Pay as you go can work for core civil service jobs - its just that it makes it hard to privatize the jobs.

I trust congress and the house also required pre funding of their benefits :-)

What's the alternative to offering low paid workers full retiree medical benefits? A bunch of bankrupt and sick and dying pensioners?

Alternative for who? For USPS, the alternative is to have a chance at a sustainable business without being subject to wildly volatile and exponentially increasing healthcare costs that could quite literally bring the whole business down. For America, the alternative is to decide, as a country, that everyone is entitled to a certain amount of healthcare. Otherwise, the alternative is whatever happens to Taco Bell and Wal Mart workers.

USPS is also one of the largest spam operations, and if it filtered out spam they would be much worse off.

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