At the conclusion to my prior article, I observed that all the discussion about whether and how the Post Office should be pre-funding its retiree medical costs, is begging the question, and that we need to be asking, “why are those costs so high in the first place?”
And, again, one of the reasons why the USPS was required to fund its retiree healthcare in advance was that it can’t eliminate the liability absent a literal Act of Congress. But another issue is that its liabilities in this respect are substantially higher than in the private sector.
Summary of pension and retiree healthcare liabilities
Both of UPS’s package-delivery competitors have significant pension liabilities, and all three companies have pension plans that are funded at nearly the same level.
Are their pension liabilities at the “right” level for each of these plans, relative to their size? There’s no simple answer. But the size of the retiree healthcare liabilities at the USPS is clearly of a much greater magnitude, relative to its pension liabilities, than for its competitors. The lack of retiree healthcare fund at UPS and FedEx barely makes a dent in the overall funded status of its promises to retirees, but at the Post Office, the poor funded status of the healthcare fund brings the overall funded status down from 85% to 73%; if there were no fund at all, the funded status would drop even further, to 63%.
Which means that, again, we can likely agree that Congress should have stretched out the funding schedule once the Post Office’s woes became apparent in the wake of the recession and the transition away from paper mail, but that there is a strong case for requiring prefunding of retiree healthcare at the USPS.
So, again, why are healthcare benefits so high?
In the first place, it is simply the case that USPS employees retain the same retiree healthcare benefits as (all other) federal employees (the FEHB, Federal Employees Health Benefits), and those benefits are far more generous than in the private sector. In the private sector, it is much more the norm for employers to offer healthcare benefits to retirees at cost, in the increasingly-rare case that they do so at all. Federal retirees, on the other hand, are able to continue their benefits at the same cost as for current employees, that is, retaining the same employer subsidies. For those workers who have not reached Medicare eligibility, this is a great bargain for retirees, and extremely expensive for the government/the Post Office.
Once workers reach Medicare eligibility, there is a further wrinkle: each retiree has the option to elect or decline Medicare Part B coverage. If the retiree elects Part B and maintains their USPS-provided health insurance, then the USPS plan functions like a “Medicare supplement” or “Medigap” plan that private-sector retirees are accustomed to buying on their own, filling in the gaps that Medicare doesn’t cover. But if a retiree chooses not to pay for Part B, then the USPS is on the hook for the entirety of these benefits (other than copays); that’s very different than a private-sector postretirement healthcare plan which requires Part B enrollment and only functions as a supplement (or carve-out) benefit. In addition, the USPS/FEHB benefits cover drugs as well, eliminating the cost of a Part D drug benefit. (For more details, see the following links at the OPM website: “Coordination of Medicare and FEHB Benefits,” “Eligibility,” and “Compare 2020 Plans.”)
And here’s the part where your head may or may not start to spin: for a retiree the decision whether or not to elect Medicare Part B, the FEHB retiree benefits, or both, is the same sort of calculus as the rest of the over-65 world might have in deciding whether or not to elect a Medicare Supplement, a Medicare Advantage, and/or any employer benefits available to them.
But if they elect to forgo the Part B enrollment, then the entirety of that retiree’s benefits are covered by the FEHB. Recall that Part B premium’s are set at 25% of the total cost of Part B services. This means that the “value” of the Medicare system’s premium subsidy is lost with respect to federal retirees. For a retiree in most government agencies, this isn’t the end of the world — it hampers the government’s ability to properly assign costs to one government agency or another vs. to the Medicare program, and, near and dear to an actuary’s heart, prevents the proper calculation of liabilities attributable to employment vs. via social insurance, but fine.
But for the Post Office, which reports its annual expenses and balance sheet according to the norms of the private-sector world, this does matter. Efforts to remedy this have been proposed, for example, the Postal Service Reform Act of 2018, which would have required that all retirees participate in Medicare Part B and Part D; this legislation was opposed by the National Active and Retired Federal Employees Association (NARFE) and died in Congress, as did a similar bill in the House the prior year. The proposal, in general terms if not that specific legislation, continues to be discussed (and the NARFE continues to oppose it), but one sticking point is that in existing proposals, the Part B/D premiums are a pure add-on cost, without any adjustment to the FEHB premiums retirees pay (which remain pegged to the active employee premiums).
And, again, it’s not that postal retirees are gaming the system – but the structure is nonetheless out of whack.
In other words, there ought to be a middle ground here — room for an alternate premium structure for Medicare retirees and yet an acknowledgement that the up-to-now generous benefit levels for retirees are simply not affordable going forward.
As always, you’re invited to comment at JaneTheActuary.com!