Postal Retiree Health Benefits: Unsustainable Finances Need to Be Addressed

USPS is required to prefund its share of health benefits costs for its retirees. To do so, USPS is required to make payments into the RHB Fund, which is administered by OPM. However, USPS has not made any payments to the fund since fiscal year 2010. At the end of fiscal year 2017, USPS had missed $38.2 billion in payments, leaving the fund 44 percent funded. Pursuant to law, beginning in fiscal year 2017, OPM started drawing from the fund to cover USPS's share of postal retirees' health benefits premiums. GAO was asked to review issues related to the sustainability of the RHB Fund.

This report examines (1) the financial outlook for the RHB Fund and (2) policy approaches for postal retiree health benefits, among other topics. GAO evaluated financial projections for the RHB Fund from OPM. GAO reviewed laws and regulations and identified policy approaches primarily by identifying legislative proposals, and literature on actions of companies and state governments to address retiree health benefits. These approaches are not exhaustive or mutually exclusive. GAO also interviewed experts in retiree health benefits and postal stakeholders, chosen on the basis of relevant publications and prior GAO work, and interviewed and obtained written responses from OPM and USPS officials.

The financial outlook of the Postal Service Retiree Health Benefits Fund (RHB Fund) is poor. At the end of fiscal year 2017, the fund's assets declined to $49.8 billion and unfunded liabilities rose to $62.2 billion. Based on Office of Personnel Management (OPM) projections requested by GAO, the fund is on track to be depleted in fiscal year 2030 if the United States Postal Service (USPS) continues to make no payments into the fund. Annual payments of $1 billion or $2 billion into the fund would extend the projected depletion date by 2 to 5 years (see figure). USPS has said that its required payments to the fund are unaffordable relative to its current financial situation and outlook. For the past 11 years USPS has incurred large operating losses that it expects will continue. Additionally, USPS has stated that its opportunities for revenue generation and cost-cutting are limited. USPS reported that it did not make required fund payments in 2017 in order to preserve liquidity and cover operational costs. If the fund becomes depleted, USPS would be required by law to make the payments necessary to cover its share of health benefits premiums for current postal retirees. Current law does not address what would happen if the fund becomes depleted and USPS does not make payments to cover those premiums. Depletion of the fund could affect postal retirees as well as USPS, customers, and other stakeholders, including the federal government. About 500,000 postal retirees receive health benefits and OPM expects that number to remain about the same through 2035.

GAO identified three categories of policy approaches for postal retiree health benefits, based on legislative proposals and pertinent literature. First, some approaches, such as generally requiring eligible postal retirees to participate in Medicare, would shift costs to the federal government. Second, some approaches would reduce benefits or increase costs to postal retirees and/or employees. Third, some approaches would change how benefits are financed (see table). All of these approaches have different potential effects and would require congressional action. Thus, it is up to Congress to consider the merits of different approaches and determine the most appropriate action to take. It would be preferable to take action when careful consideration is possible, rather than wait until lack of adequate funding could disrupt postal retiree health benefits.

Congress should consider passing legislation to put postal retiree health benefits on a more sustainable financial footing. USPS agreed that congressional action is needed and offered views on some policy approaches discussed in this report.

About 500,000 postal retirees currently receive federal retiree health  benefits. Unlike most federal entities, the U.S. Postal Service (USPS) is  required to prefund its share of health benefits for its retirees. To do so,  USPS is required to pay money into the Postal Service Retiree Health  Benefits Fund (RHB Fund), which is administered by the Office of  Personnel Management (OPM). However, USPS has experienced  financial difficulties and has not made its required payments to the RHB  Fund since 2010. Those missed payments totaled $38.2 billion through  the end of fiscal year 2017. At the same time, the fund had assets of  $49.8 billion but liabilities of $112.1 billion—leaving a shortfall of $62.2  billion in unfunded liabilities—and thus only 44 percent of the liabilities  were funded. Further, pursuant to law, beginning in fiscal year 2017, OPM  started drawing from the RHB Fund to cover USPS’s share of premiums  for postal retirees’ health benefits.

Challenges related to funding and providing retiree health benefits are not  unique to USPS. For years, private companies and state governments  have been similarly challenged with the rising costs of providing retiree  health benefits and have taken actions to address this issue. However, no  consensus exists about what actions should be taken to address the  growing financial shortfall for postal retiree health benefits. You asked us  to review issues related to postal retiree health benefits funding and what  lessons could be learned from the efforts of other organizations including  companies and state governments that have dealt with retiree health  benefits issues.

This report examines (1) the financial outlook for the RHB Fund, (2)  actions that companies and state governments have taken to address  retiree health benefit costs, and (3) possible policy approaches regarding  postal retiree health benefits.

To assess the financial outlook for the RHB Fund, we obtained OPM’s  projections for the RHB Fund’s income and expenses and reviewed  written comments of USPS and OPM officials on the fund. Next, we  evaluated the projections and statements against statutory provisions  specifying the fund’s responsibilities for funding postal retiree health  benefits. We discussed the methods and assumptions underlying OPM’s  estimates with OPM officials, and concluded that OPM’s projections  would be reasonable for our purposes, but we did not otherwise evaluate  the underlying data, which were outside the scope of this review. The  baseline scenario that OPM developed was based on a continuation of  current practices in which USPS would make no additional payments into  the fund. In addition, we interviewed and obtained written responses  from OPM and USPS officials.

To identify actions the private sector and state governments have taken  to address retiree health costs and obtain a broad perspective on how  these entities have dealt with issues in this area, we identified reports and  articles issued from 1998 through 2018 on retiree health benefits provided  by companies and state governments, based on searches in bibliographic  databases and other online resources, prior GAO work, and interviews  with experts on retiree health benefits. We conducted interviews with 20 experts in retiree health benefits and four postal stakeholders, including  two postal labor unions and two mailer groups, chosen on the basis of our  review of relevant publications and prior GAO work.

In addition, we identified and used data from surveys on companies’  provision of retiree health benefits. These surveys were sponsored by:  the Kaiser Family Foundation and the Health Research & Educational  Trust (Kaiser/HRET) from 1999 through 2017 and  the U.S. Department of Health and Human Services’ Agency for  Healthcare Research and Quality (AHRQ), which sponsored the  Medical Expenditure Panel Survey, Insurance Component, from which  we used data from 2003 through 2016.

The Kaiser/HRET and AHRQ surveys were selected because they were  generalizable at the national level and used comparable methodology  across time. We conducted a data reliability assessment of both surveys  by reviewing documentation related to how the survey data were  collected and processed. We found these surveys produced evidence of  sufficient quality for the purposes of our reporting objectives.

To identify and select approaches that could address postal retiree health  benefits, we identified legislative proposals and the experiences of private  companies and state governments based on the work described above.  In addition, we considered input provided during our interviews with  experts in retiree health benefits and postal stakeholders, and drew on  our prior work.

We conducted this performance audit from June 2017 to August 2018 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Postal retiree health benefits are provided as part of the Federal  Employees Health Benefits Program (FEHBP). FEHBP covers federal  employees and retirees, including postal and nonpostal retirees, who  receive health insurance from companies that contract with OPM. Retiree  participation is voluntary; in fiscal year 2018, about 500,000 postal  retirees have participated in FEHBP.

Funding requirements for postal retiree health benefits are established by  law, which divides responsibility among USPS, the federal government,  and postal retirees. USPS is responsible for a specific percentage of  premiums, the federal government is responsible for paying a prorated  share, and retirees are responsible for the rest. The funding  requirements for these benefits changed in 2006. Before then, a “pay-as- you-go” system governed USPS’s payments, which required USPS to pay  its share of premiums for current postal retirees. The 2006 Postal  Accountability and Enhancement Act (PAEA) required USPS to start fully  “prefunding” retiree health benefits. This meant that USPS was required  to make annual prefunding payments to a newly established fund to build  up funds to cover USPS’s share of future postal retiree health benefit  costs. PAEA also established the RHB Fund as a new fund in the U.S.  Treasury for USPS to deposit money into, and specified that beginning in  fiscal year 2017, the fund would be used by OPM to pay USPS’s share of  postal retiree premiums for health benefits. Under PAEA, the first 10  years of prefunding payments were fixed—ranging from $5.4 billion to  $5.8 billion annually from fiscal years 2007 to 2016. From fiscal years  2007 through 2016, USPS was also required to continue “pay-as-you-go”  payments for its share of premiums for current retirees. The permanent  schedule for USPS payments to prefund postal retiree health benefits  under PAEA started in fiscal year 2017.

We have reported that USPS’s financial condition continues to deteriorate  and its outlook is bleak. We have separately issued reports and  testimonies that examined USPS’s financial condition, including its  liabilities, and identified strategies and options for USPS and Congress to  reduce postal costs, generate revenue, and restructure the funding of  USPS’s pension and retiree health benefits. Looking forward, we have  reported that USPS is facing unsustainable financial challenges as First- Class Mail volume continues to decline. USPS has recently reported  that its revenue generation options are constrained, including by the price  cap on market-dominant mail, and that any cost-cutting opportunities  within its control are “relatively limited and dwindling.” USPS stated that  the opportunity for further cost savings within its control will not come  close to filling its financial gap.

With respect to actions taken by companies and state governments, we  have previously reported on the long-term trend for these organizations to  eliminate or reduce retiree health benefits. Factors contributing to this  decline include financial challenges for companies and states, current and  expected retiree health benefit costs, and the legal ability to change  retiree health benefit programs.

The Financial Outlook of the Postal Service Retiree Health Benefits Fund Is Poor

The RHB Fund is on an unsustainable path and is projected to be  depleted in 12 years under the status quo. USPS has missed  approximately $38 billion in payments to the fund since fiscal year 2010,  and the fund’s balance is declining. Beginning in fiscal year 2017, OPM  started drawing from the fund to pay USPS’s share of premiums for postal  retirees’ health benefits. OPM’s payments in that year exceeded the  fund’s income from interest, and OPM projects that, based on the status  quo, future payments will continue to exceed the fund’s income from  interest. As long as USPS continues to miss its annual payments—which  were nearly $4.3 billion in fiscal year 2017 and are $4.5 billion in fiscal  year 2018—the fund is on track to be depleted in fiscal year 2030 based  on OPM projections requested by us (see fig. 1). We reported similar  results in our December 2012 report on postal retiree health benefits.

At our request, OPM conducted a sensitivity analysis in which alternative  projections were made that assumed USPS made payments to the fund  of $1 billion per year or $2 billion per year; these alternative projections  extended the fund’s projected depletion date from fiscal year 2030 to  fiscal years 2032 or 2035, respectively (see fig. 2). OPM estimates the  number of postal retirees eligible for federal retiree health benefits will  remain near the current level of 500,000 through fiscal year 2035.

The outlook for the RHB Fund is poor as USPS has inadequate resources  to cover its required payments to the RHB Fund and, in our view, based  on past practices and USPS statements, appears unlikely to make partial  payments. USPS has repeatedly testified that its required payments to  the RHB Fund are “unaffordable” relative to its current financial situation  and outlook. In this regard, USPS accumulated net losses of more than  $65 billion in the last 11 years and has budgeted for a net loss of about  $5 billion in fiscal year 2018. Further, USPS reached its statutory  borrowing limit of $15 billion in 2012. Although USPS accumulated liquid  assets (cash and cash equivalents) of about $10.5 billion at the end of  fiscal year 2017, it did not make $6.9 billion in required payments for  retiree health and pension benefits. According to USPS officials, USPS  did not make these payments in order to preserve liquidity and cover  operational costs.

If the RHB Fund is depleted, PAEA requires USPS to fill the resulting  financial gap by resuming “pay-as-you-go” payments for its share of  retiree health premiums that are currently being paid by the fund.  However, PAEA does not address how funding will be provided or  whether benefits will be provided if the fund becomes depleted and USPS  does not make payments to cover its share of premiums.

OPM and USPS have identified the following issues should the fund be  depleted:

According to OPM: (1) The RHB Fund is the initial funding source for  USPS’s share of postal retirees’ health insurance premiums as long  as money remains in the fund. (2) If the fund is depleted, then USPS  becomes the funding source responsible for paying USPS’s share of  these premiums. (3) Regardless of whether funds are available to pay  USPS’s share of premiums, postal retirees are statutorily entitled to  remain enrolled in their FEHBP plans. (4) Therefore, if the fund is  depleted and USPS does not pay its share of premiums, the providers  of these FEHBP plans would be underpaid.

According to USPS: (1) Current law does not appear to contemplate a  situation in which USPS itself is unable to make payments to the RHB  Fund after the fund is depleted. (2) The law does not condition postal  retirees’ eligibility for health benefits upon the fund or the payment of  government contributions by USPS and the federal government. (3)  Therefore, USPS stated it is reasonable to expect that postal retirees  would remain eligible for health coverage even if USPS is unable to  make payments to the RHB Fund after it is depleted. Regarding who  would pay for their health coverage at this point, USPS stated that  ultimately, it would be up to Congress to legislate a resolution to the  funding issue.

As the above projections show, the RHB Fund could be depleted in as  little as 12 years—and USPS may be unable to cover its share of retiree  health insurance premiums should its financial condition remain  precarious. Depletion of the fund could affect postal retirees—who have  provided a vital service to the nation—as well as USPS, postal customers  and other stakeholders, including the federal government.

Many Companies and State Governments Have Cut Retiree Health Benefits to Control Costs

A Small and Decreasing Percentage of Companies Continue to Offer Retiree Health Benefits

Survey data we reviewed indicate that most companies do not offer  retiree health benefits and that the number of companies providing such  benefits is decreasing over time. For example, the percentage of all  private and public organizations (e.g., state or local governments) with  more than 200 employees that offer employee health benefits and that  also offer retiree health benefits is estimated to have declined from 40  percent in 1999 to 25 percent in 2017, according to annual surveys  conducted by the Henry J. Kaiser Family Foundation and the Health  Research & Educational Trust (Kaiser/HRET).

Focusing specifically on the results for private for-profit companies, the  2017 Kaiser/HRET survey estimated that only 11 percent of companies  with at least 200 employees that offered health benefits to active  employees also offered retiree health benefits in 2017, the smallest  percentage since comparable data were measured in 2012. The 2017  Kaiser/HRET survey also estimated that the percentage of companies  offering retiree health benefits was greater among companies with at  least 5,000 employees (35 percent) than those with 1,000 to 4,999  employees (18 percent) and those with 200 to 999 employees (9 percent)  (see fig. 3).

Surveys sponsored by the Agency for Healthcare Research and Quality  (AHRQ) have estimated similar trends for private sector establishments  with at least 1,000 employees and with 100-999 employees. According  to the AHRQ surveys, an estimated 25 percent of private sector  establishments with at least 1,000 employees offered health insurance  coverage to retirees age 65 and older in 2016, down from 41 percent in  2003. For retirees under 65, an estimated 32 percent offered such  coverage in 2016, down from 42 percent in 2003 (see fig. 4).

Many Companies with Retiree Health Benefits Have Changed Eligibility or Benefit Structures

Based on reports we reviewed and experts we interviewed, many  companies that have retained their retiree health benefits have done so  by making changes to control costs, including tightening eligibility and  restructuring benefits. Depending on the company, the changes have  applied to new hires, current employees, or retirees. Specific changes  have included the following:

Tightening eligibility: Some companies have made new employees  and/or employees hired after a given date ineligible to receive retiree  health benefits, while other companies have increased the minimum  age and/or length of service requirements for eligibility, according to  reports and experts we interviewed.

Restructuring benefits: Many companies have restructured retiree  health benefits to reduce the level of the benefit, to shift costs to  retirees, and to change how the benefits are provided. For example,  some companies have shifted from an approach under which a  company pays a percentage of premiums for a selected health benefit  plan, to an approach under which a company pays a fixed dollar  amount that employees may put toward health care costs. The 2017  Kaiser/HRET survey estimated that 30 percent of private and public  organizations with 200 or more employees that offer retiree health  benefits provide a fixed dollar amount that the retiree can use to  purchase a retiree health plan they choose. Experts on retiree  health benefits that we interviewed told us such companies often shift  costs to retirees by maintaining defined contributions at the same  level over time, even as overall health care costs increase.

State Governments Have Also Changed Eligibility or Benefit Structures

Based on multiple reports and experts, nearly all state governments  continue to offer retiree health benefits to at least some state government  retirees but generally have shifted some costs from the state to retirees  and/or active employees in various ways. For example, in 2016, the  Pew Charitable Trusts and the John D. and Catherine T. MacArthur  Foundation reported on the following recent changes at the state level  related to eligibility for retiree health benefits, benefit levels, and aspects  of how the benefits coordinate with Medicare:

Tightening eligibility or limiting benefit levels: Most states varied  eligibility for retiree health benefits based on factors such as age and  years of service, and varied benefit levels based on factors such as  date of hire, date of retirement, or vesting eligibility; some states  varied benefit levels based on years of service. Between 2000 and  2015, more than a dozen states changed the minimum age or the  number of state service years required for retirees to be eligible for  health benefits. During that timeframe, at least 10 states adopted  formulas for prorating benefits that required different premium-sharing  amounts based on years of service, or altered existing prorating  formulas, bringing the total to 31 states that used prorating in 2015. At  least 5 states stopped making any contributions to health premiums  for certain retirees.

Medicare coordination: Thirty-five states provided employer- sponsored Medicare Advantage or Medicare Part D plans, known as  Employer Group Waiver Plans, to provide health or prescription drug  benefit coverage for Medicare-eligible retirees since these options  were authorized in 2003. According to the report, “These cost- saving programs provide states with financial subsidies from the  federal Medicare program to provide Medicare plus wraparound  benefits.”

Various Policy Approaches to Address the Sustainability of Postal Retiree Health Benefits Could Have Wide-Ranging Effects

We identified eight potential policy approaches to address the financial  sustainability of postal retiree health benefits, primarily based on a review  of legislative proposals and pertinent literature on actions that were taken  by private companies and state governments and are discussed above.  These approaches fall into three categories: (1) approaches that shift  costs to the federal government; (2) approaches that reduce benefits or  increase costs to postal retirees and/or postal employees; and (3)  approaches that change how the benefits are financed.

These eight approaches are not mutually exclusive, nor are they an  exhaustive list of possible approaches. Each approach could include a  range of specific options; thus, even if successfully implemented, no one  approach would necessarily be sufficient to make postal retiree health  benefits financially sustainable. Although our discussion of the various  policy approaches specifically addresses postal retiree health benefits,  most approaches could address federal retiree health benefits more broadly, as both postal and non-postal federal employees participate in  the same federal health benefits program.

All approaches we identified have different potential effects and would  require congressional action because current law establishes certain  requirements for postal retiree health benefit plans, including basic rules  for benefits, enrollment, and participation, and how benefits are to be paid  for. Because the RHB Fund has a large and growing financial gap, any  approach that would have a significant financial impact could affect the  federal government, postal retirees, postal employees, USPS, and  customers to varying degrees.

Some Approaches Would Shift Costs to the Federal Government

Medicare Integration: Various legislative proposals have been made to  increase postal retirees’ participation in Medicare—a shift that would  decrease USPS’s costs but increase Medicare’s costs, according to  analyses by the Congressional Budget Office (CBO). These proposals  would establish a program within FEHBP for active postal employees and  postal retirees. Under these bills, Medicare-eligible postal retirees  enrolled in this program would generally also be required to be enrolled in  Medicare Parts A, B, and D. According to CBO analyses, the bills would  have resulted in USPS savings, in part because increased participation in  Medicare would shift primary responsibility for covering certain health  care services to Medicare for those who enroll. As we have previously  reported, the primary policy decision for Congress to make is whether to  increase postal retirees’ use of Medicare.

Supplemental federal appropriations: If the RHB Fund becomes depleted  and USPS does not fill the financial gap, supplemental federal  appropriations could be an alternative if Congress wants benefits to  continue at the same level. As previously noted, OPM officials told us  that regardless of whether funds are available to pay USPS’s share of  premiums, postal retirees are statutorily entitled to remain enrolled in their  FEHBP plans. However, supplemental federal appropriations for postal  retiree health benefits could increase the federal budget deficit. In  addition, supplemental appropriations for postal retiree health benefits  would be inconsistent with USPS functioning as a self-financing entity that  covers its costs with revenue it generates.

Some Approaches Would Reduce Benefits or Increase Costs to Postal Retirees and/or Employees

Tighten eligibility or reduce or eliminate retiree health benefits: As some  companies and state governments have done, eligibility restrictions could  be tightened for postal retiree health benefits, or other actions could  reduce the level of benefits or even eliminate benefits, such as making  new hires ineligible to receive retiree health benefits. The effects would  depend on the specific changes and whether they were made to apply to  current retirees, current employees, or future hires. Depending on the  extent of the changes, this approach would reduce USPS’s liability for  postal retiree health benefits and thereby reduce its unfunded liability.

Increase premium payments by postal retirees and/or postal employees:  As some companies and state governments have done, premium  payments for postal retiree health benefits by postal retirees and/or postal  employees could be increased. For example, as others have reported,  some companies and state governments have required retirees to pay  100 percent of the health insurance premium for their retiree health  benefits. Similarly, a larger share of retiree health premiums could be  borne by postal retirees or postal employees could be required to pay  for retiree health benefits before they retire. Such changes would require  changes to current law that allocates specific financial responsibility for  payments among USPS, the federal government, and retirees  participating in FEHBP, as active postal employees make no payment for  retiree health benefits under current law.

The expenses of the RHB Fund could be decreased by these approaches  that shift costs to postal retirees, postal employees, or both. Depending  on how much of the costs are shifted, the additional costs could increase  the challenge for retirees to ensure their accumulated resources last  throughout retirement, or for postal employees to save for retirement.  Further, as we have reported, rising health care costs can increase the  overall amount individuals may need to save to ensure they have an  adequate income once they retire.

Change the federal contribution to a fixed subsidy: As some companies  and state governments have done, postal retiree health benefits could be  shifted to a structure with a fixed amount subsidizing the benefit. This  amount could be adjusted over time; any adjustments might or might not  keep up with costs. Depending on the initial size of the fixed subsidy and  any adjustments over time, this approach could reduce the expenses of  the RHB Fund and USPS’s required payments. RHB Fund expenses  could be reduced over time if the fixed subsidy increases less than postal  retiree health premiums. This approach would require changes to current  law and regulations that prescribe the federal government’s financial  contribution to FEHBP. For example, CBO recently identified one option  to change FEHBP’s statutory structure from a premium-sharing structure  that is required by law to fixed subsidies for health benefits. Under this  option, the fixed subsidies would grow at the rate of inflation rather than at  the average rate of growth for FEHBP premiums; CBO stated this change  would be expected to slow the growth of federal contributions to FEHBP.  A fixed subsidy for retiree health benefits could increase incentives for  retirees to make less costly decisions with respect to health care.  However, this approach could result in greater cost exposure for retirees,  who may face difficult decisions regarding their health care, particularly if  their financial resources are limited. As we have reported, individuals face  the risk that rising and unpredictable health care or long-term care costs  may lead them to draw down their retirement savings faster than  expected.

Establish a non-federal voluntary employees’ beneficiary association  (VEBA) for postal retiree health benefits: As some companies have done  to provide retiree health benefits separately from the employer, a VEBA  outside the federal government could be established to manage postal  retiree health benefits. This approach means that postal retiree health  benefits would be provided through the VEBA instead of through the  OPM-administered FEHBP. The non-federal VEBA would administer the  postal retiree health benefits program, including determining the specific  benefits that would be provided and the level of contributions from the  VEBA members—who could include retirees and employees—and the  investing of its assets. Such an approach would require determining the  VEBA’s governance structure, funding sources, level of funding, type of  investments, and associated market risks. One issue could be  determining the source and level of initial funding for a new VEBA for  postal retiree health benefits, such as whether initial funding would come  from the RHB Fund, the Treasury, or both. Other issues could be what  funds would be provided to the VEBA going forward, including the  source(s) and level of funding, and what the benefit levels would be. If the  entire RHB Fund were transferred into a VEBA, the current level of  benefits would ultimately not be sustainable unless further funding is  provided from one or more sources, such as from USPS, retirees, active  employees, or the federal government. Thus, trade-offs would involve  what level of benefits would be provided, who would bear the costs, and  what might happen if VEBA assets decline or become depleted.

Some Approaches Would Change How Benefits Are Financed

Reduce the required level of prefunding: Proposed legislation includes an  80 percent funding target for postal retiree health benefits instead of the  100 percent target established by current law. This would reduce  USPS’s required payments to the RHB Fund but could increase costs for  future postal ratepayers and increase the risk that USPS may not be able  to pay for these costs. As previously discussed in this report, state  governments either do not prefund their retiree health benefits or generally have a low level of prefunding. We have expressed concern  about a proposed 80 percent funding target for postal retiree health  benefits that would have the effect of carrying a permanent unfunded  liability equal to roughly 20 percent of USPS’s liability, which could be a  significant amount. As we previously reported, an alternative could be to  build in a schedule to achieve 100 percent funding in a later time period  after the 80 percent level is achieved. Although USPS payments with an  80 percent funding target would reduce USPS’s required payments, fully  funded benefits protect against an inability to make payments later, make  promised benefits less vulnerable to cuts, and protect USPS’s long-term  viability. Further, reducing the funding target is unlikely to have any  effect as long as USPS continues to make no payments to the RHB Fund,  as discussed earlier.

We continue to believe that as long as USPS is required by law to pay its  share of retiree health benefits premiums, it is important for USPS to  prefund its retiree health benefit liability to the maximum extent that its  finances permit. We recognize that multiple options exist to prefund  benefits and amortize unfunded liability and that no prefunding approach  will be viable unless USPS can make the payments and maintain liquidity.  As we have reported, making affordable prefunding payments would  protect the viability of USPS by not saddling it with bills later on, when  employees are already retired and no longer helping it to generate  revenue; making payments can also make the promised benefits more  secure. We also have reported that deferring payments can pass costs  from current to future postal ratepayers. To the extent prefunding is  postponed by using a lower funding target, larger payments will be required later, when they likely would be supported by lower levels of  profitable First-Class Mail volume.

Outside investment: Proposed legislation would initially require 25 percent  of the RHB Fund to be invested in index funds modeled after those used  for federal Thrift Savings Plan investments. The objective of investing  RHB Fund assets outside of U.S. Treasury securities would be to seek a  greater rate of return on these assets in an attempt to reduce unfunded  liabilities and the amount of required prefunding payments. Such outside  investment would require legislation because current law limits RHB Fund  assets to U.S. Treasury securities that are backed by the full faith and  credit of the federal government. A higher rate of return on RHB Fund  assets could reduce long-term funding needs. However, there are other  considerations. For example, we have reported that if fund assets were  invested in non-Treasury securities, the fund may experience losses in a  market downturn and would thus have reduced assets available for health  care. Assuming there would be no explicit federal guarantee of the  value of the invested assets, we stated that USPS is not well positioned  to deal with a potentially significant decline in their value, given its  significant operating losses and continuing decline in mail volume. We  also reported that the impact of any asset losses could be magnified  because a market downturn that negatively affects asset value could be  associated with a more general economic downturn that negatively  affects USPS mail volume and revenues.

About a half million postal retirees receive retiree health benefits. Postal  retirees have provided a vital service to the nation, and resolving a key  aspect of their future situation warrants congressional action. Failure to  address the poor financial outlook of the RHB Fund could pose serious  consequences for these retirees as well as USPS, postal customers, and  other stakeholders, including the federal government. It is reasonable to  believe that USPS will not be able to fill the financial gap once the RHB  fund is depleted—a situation that could occur in as little as 12 years under  the status quo. There is no certainty on what actions should be taken to  address this problem. However, we have identified multiple approaches  that could be used, individually or in combination, that Congress could  consider to help address the financial shortfall in this area. All of these  approaches have different potential effects, and it is up to Congress to  consider the merits of the approaches and determine the most  appropriate action to take. It would be preferable to take action when  careful consideration is possible, rather than wait until lack of adequate  funding could disrupt postal retiree health benefits.

We provided a draft of this report to OPM and USPS for their review and  comment. OPM provided technical comments, which we incorporated as  appropriate. USPS provided a written response, which is reproduced in  appendix II of this report.

In its written response, USPS stated that it concurred with our matter for  congressional consideration that congressional action is necessary to  achieve a financially sustainable Postal Service Retiree Health Benefits  Fund (RHB Fund). However, USPS said our discussion of potential policy  approaches for postal retiree health benefits would benefit from additional  context and balance. USPS also put forth additional information for three  of the potential policy approaches highlighted in our report. Our report  presents a high-level overview of eight potential policy approaches. It was  not designed to be a comprehensive catalog of possible options with an  analysis of the various considerations relevant to each.

With regard to the Medicare integration approach, USPS stated that  increased Medicare participation by postal retirees is not limited to the  “full Medicare integration option,” as represented in our report and  identified variations of such an approach. USPS said readers would  benefit from a fuller picture of Medicare integration practices, stating that  among employers that continue to provide retiree health benefits, full  Medicare integration is a uniform best practice. USPS cited a 2014 report  that said Medicare integration is the most common arrangement for  employer-provided retiree health benefits, adding that retiree health  benefits for Medicare-eligible employees are assumed to be merely  supplemental to Medicare as a matter of course. Our report discussed  Medicare integration by state governments, but did not present recent  data on the percentage of private companies that coordinate their retiree  health benefits with Medicare because such data are not publicly  available. Additionally, USPS said our report framed the issue of  Medicare integration as “solely” a tradeoff between USPS and Medicare  costs while there are other factors to consider, such as the relative  benefits to USPS compared to the overall cost for the Medicare program.  As we noted in our report, the eight potential policy approaches were not  designed to be mutually exclusive, nor an exhaustive list of possible  approaches. Additionally, we recognize there are various factors related  to this approach, but that the primary one is whether to increase postal  retirees’ use of Medicare which would lead to further increasing Medicare  costs.

Second, USPS said it believed our statements about approaches for  changing the level of prefunding for retiree health benefits below the 100  percent level were misplaced, citing “universally accepted practices” for  other entities to “pay-as-you-go” (i.e., not prefund at all), or to prefund at  much lower levels. We have reported on such funding levels in the past  as well. However, a proposed 80 percent funding target for postal  retiree health benefits would have the effect of carrying a permanent  unfunded liability equal to roughly 20 percent of USPS’s liability, which could be a significant amount. As we previously reported, an alternative  could be to build in a schedule to achieve 100 percent funding in a later  time period after the 80 percent level is achieved. As our report also  explained, although USPS payments with an 80 percent funding target  would reduce USPS’s required payments, fully funded benefits protect  against an inability to make payments later, make promised benefits less  vulnerable to cuts, and protect USPS’s long-term viability.

Finally, USPS said that our statements about potential risks associated  with investment of assets outside the U.S. Treasury seem  disproportionate given USPS’s view that diversification of assets set aside  for retiree health benefits is “universally accepted” as a best practice. We  recognize that a higher rate of return on RHB Fund assets could reduce  long-term funding needs for the RHB Fund. However, there are  considerations specific to USPS. For example, assuming there would be  no explicit federal guarantee of the value of the invested assets, we  stated that USPS is not well positioned to deal with a potentially  significant decline in their value, given its significant operating losses and  continuing decline in mail volume. We also noted that, as we have  previously reported, the impact of any asset losses could be magnified  because a market downturn that negatively affects asset value could be  associated with a more general economic downturn that also negatively  affects USPS mail volume and revenues.

In summary, we believe our report presents a balanced description of a  wide range of possible policy options; it does not endorse or recommend  any particular option for Congress. As we concluded, all of these  approaches have different potential effects, and the information we  present, as well as the additional views presented by USPS, provide  critical information for congressional decision-makers to assess as they  consider the merits of the approaches and determine the most  appropriate action to take.

As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees; the Postmaster General; and the Director of  the Office of Personnel Management. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov. If you  or your staff have any questions concerning this report, please contact  me at (202) 512-2834 or rectanusl@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff that made key contributions to this  report are listed in appendix III.

Appendix I: Postal Retiree Health Benefits Trend Data

End of year  net funded  status  (unfunded)   (55.0)

payments due on Sept. 30, 2017, of $955 million for the amortization of USPS’s unfunded liability for  postal retiree health benefits, and $3.3 billion for the “normal costs” of retiree health benefits. The  “normal cost” is the annual expected growth in liability attributable to an additional year of employees’  service.

Appendix II: Comments from the U.S. Postal Service

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the individual named above, Derrick Collins (Assistant  Director); Kenneth John (Analyst-in-Charge); Amy Abramowitz;  Taiyshawna Battle; William Colwell; Swati Deo; John Dicken; Leia  Dickerson; William Hadley; James Leonard; Emei Li; Thanh Lu; Sara Ann  Moessbauer; Joshua Parr; Malika Rice; Matthew Rosenberg; Amy  Rosewarne; Frank Todisco; and Crystal Wesco made key contributions to  this report.

About 500,000 postal retirees receive retiree health benefits. The Postal Service Retiree Health Benefits Fund pays most of the costs.

The Postal Service has not made $38.2 billion in required payments to this fund through fiscal year 2017. If it makes no more payments, the Office of Personnel Management projects the fund will be depleted in fiscal year 2030.

We highlighted several approaches to address this shortfall, such as requiring most eligible retirees to participate in Medicare, increasing cost-sharing, or reducing benefits.

Congress should consider legislation to put postal retiree health benefits on a more sustainable footing.