In the long term, USPS will be challenged to pay for its liabilities  on a smaller base of profitable First-Class Mail. We have previously reported that Congress needs to modify USPS’s  retiree health benefit payments in a fiscally responsible manner.we also stated that USPS should prefund any unfunded retiree health  benefit liability to the maximum extent that its finances permit. Deferring  funding for postal retiree health benefits could increase costs for future  ratepayers and increase the risk that USPS may be unable to pay for  these costs. Key considerations for Congress regarding the requirements for funding  postal retiree health benefits include the following:
Trade-offs regarding USPS’s current financial condition and long-term  prospects: One of the rationales for prefunding retirement benefits is  to protect the future viability of the organization by paying for  retirement benefits as they are being earned, rather than after  employees have already retired. However, USPS currently lacks  liquidity and postal costs would need to decrease, or postal revenues  to increase, or both, to fund required payments for prefunding retiree  health benefits. To the extent prefunding payments are postponed,  larger payments will be required later, when they likely would be  supported by less First-Class Mail volume. No prefunding approach  will be viable unless USPS can make the required payments. Possible consequences to USPS employees and retirees: Funded  benefits protect against an inability to make payments later, make  promised benefits less vulnerable to cuts, and reduce the risk that  employee pay and benefits may not be sustainable and could be  reduced. Allocating costs between current and future ratepayers: Deferring  payments until later can have the effect of passing costs from current  to future postal ratepayers. The appropriate allocation of costs among  different generations of postal ratepayers is complicated by what  might be called the “legacy” unfunded liability that was not paid for in  prior years. If an 80 percent funding target were implemented because  of concerns about USPS’s ability to achieve a 100 percent target level  within a particular time frame, an additional policy option to consider  could include a schedule to achieve 100 percent funding in a  subsequent time period after the 80 percent level is achieved. We have reported that USPS would likely realize large financial gains  from its proposed health care plan. According to USPS’s estimates,  USPS would reduce its health benefits expenses and eliminate its  unfunded retiree health benefit liability, primarily by increasing the use of  Medicare by postal retirees once they are eligible for Medicare generally  beginning at age 65. As Congress considers proposals for a USPS health care plan, it should  weigh the impact on Medicare as well as other issues, including  establishing safeguards for plan assets and ensuring FEHBP-comparable  protections for plan participants. Specifically, Congress  should consider:  safeguards for USPS health plan fund assets by placing appropriate  constraints on their asset allocations (for example, limiting  investments to Treasury securities, including inflation-indexed  Treasury securities; or, to the extent that more risky assets are  permitted, using a conservative approach to setting the prefunding  discount rate); standards for the disposition of any surplus health plan assets that  reduce the risk of a new unfunded liability emerging in the future (for  example, standards for amortizing any surplus to mirror the  amortization of any unfunded liability); designation of an independent entity responsible for selecting  actuarial assumptions used to determine the health plan’s funded  status; and protections for postal employees and retirees that are comparable to  those under FEHBP, including a formula for retirees’ contribution to  health costs. conservative approach to permit USPS to access any FERS surplus  would be to use it to reduce USPS’s annual FERS contribution by  amortizing the surplus over 30 years (which would mirror the legally  required treatment of deficits). Otherwise, returning surpluses  whenever they develop would likely eventually result in an unfunded  liability. Key issues for Congress to consider in connection with the potential  USPS FERS surplus include:
Fluctuations in estimated liabilities: Estimates of liabilities for  retirement benefits contain a significant degree of uncertainty and can  change over time. __________________________________________________________  In closing, we continue to believe that a comprehensive package of  legislative actions is needed so that USPS can achieve financial viability  and assure adequate benefits funding for more than 1 million postal  employees and retirees. Under one option of USPS’s proposal (which USPS refers to as “Scenario 2”),a its health  plan would be financed by a newly created fund called the Health Benefits Fund (HBF)  that would include: (1) the entire Postal Service Retiree Health Benefits Fund that would  be abolished upon its transfer to the HBF; (2) the balance of the fund that finances  FEHBP allocable to contributions by USPS, postal employees and retirees, including any  reserve fund amounts; (3) USPS contributions under its health plan; (4) contributions of  postal employees and retirees under the USPS health plan; (5) any interest on HBF  investments; (6) any other USPS receipts allocable to the USPS health benefits plan; and  (7) appropriations based on the service of officers and employees of the former U.S. Post  Office Department.
Why GAO Did This Study

USPS continues to be in a serious financial crisis, with little liquidity in the short term and a challenging financial outlook in the long term as profitable First-Class Mail volume continues to decline. Critical decisions by Congress are needed on postal reform legislation that has been proposed in both the U.S. Senate and the House of Representatives. Various proposals would restructure the financing of postal retiree health benefits, including required payments to prefund these benefits; enable USPS to introduce a new health plan for postal employees and retirees; and restructure the funding of postal pensions, including addressing a potential surplus in funding postal pensions under FERS.
GAO has previously testified that a comprehensive package of legislative actions is needed so that USPS can achieve financial viability and assure adequate benefits funding for more than 1 million postal employees and retirees. GAO has also previously reported on various approaches Congress could consider to restructure the funding of USPS retiree health benefits and pensions.
This testimony discusses (1) funding USPS retiree health benefits; (2) USPS's proposal to withdraw its employees and retirees from FEHBP and establish its own health plan; and (3) a potential surplus in funding postal pensions under FERS. This testimony is based primarily on GAO's past work.

What GAO Found

GAO has reported that Congress needs to modify the U.S. Postal Service's (USPS) retiree health benefit payments in a fiscally responsible manner. GAO also has reported that USPS should prefund any unfunded retiree health benefit liability to the maximum extent that its finances permit. Deferring funding for postal retiree health benefits could increase costs for future ratepayers and increase the risk that USPS may not be able to pay for these costs. Key considerations for funding postal retiree health benefits include:
Trade-offs regarding USPS's current and long-term financial condition: One rationale for prefunding is to protect USPS's future viability by paying for retirement benefits as they are being earned. However, USPS currently lacks liquidity to fund required payments for prefunding retiree health benefits. To the extent prefunding is postponed, larger payments will be required later, when they likely would be supported by less First-Class Mail volume. No prefunding approach will be viable unless USPS can make the payments.
Possible consequences to USPS employees and retirees: Fully funded benefits protect against an inability to make payments later and make promised benefits less vulnerable to cuts.
Allocating costs between current and future ratepayers : Deferring payments can pass costs from current to future postal ratepayers. Allocating costs among different generations of ratepayers is complicated by the unfunded liability that was not paid for in prior years.
Funding targets : An 80 percent funding target for postal retiree health benefits would effectively lead to a permanent unfunded liability of roughly 20 percent. An option could be to build in a schedule to achieve 100 percent funding in a later time period after the 80 percent level is achieved.
GAO has reported that USPS would likely realize large financial gains from its proposal to withdraw its employees and retirees from the Federal Employees Health Benefits Program (FEHBP) and establish its own health plan. According to USPS's estimates, these financial gains would significantly reduce its health benefits expenses and eliminate its unfunded retiree health benefit liability--with increased use of Medicare by retirees comprising most of the projected liability reduction. USPS also has projected that its proposal will increase Medicare spending. As Congress considers proposals for a USPS health care plan, it should weigh the impact on Medicare, which also faces fiscal pressure, and other issues, including establishing safeguards for assets of the USPS health plan and ensuring protections for plan participants are comparable to those in FEHBP.
GAO has also reported on key considerations regarding the release of any Federal Employees Retirement System (FERS) surplus to USPS. First, estimates of retirement benefits liabilities contain a significant degree of uncertainty and can change over time. Second, returning surpluses whenever they develop would likely result in an eventual unfunded liability. Alternative options to address funding surpluses include reducing USPS's annual FERS contribution either by amortizing the surplus over 30 years (which would mirror the treatment of deficits) or by offsetting the contribution against the full surplus each year until the surplus is used up.