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Disaster at the U.S. Postal Service

‘Neither snow nor rain nor heat nor gloom of night stays these couriers from swift completion of their appointed rounds,” reads the inscription over the entrance of the James Farley Post Office in New York City. Unfortunately, that list does not include crippling debts.

Unless Congress acts — which seems unlikely to the vanishing point, given partisan disagreements over how to address the problem — the United States Postal Serviceis set to default for the first time in the 237-year history of the U.S. Post Office/Postal Service, failing to make a $5.5 billion payment to the U.S. Treasury for future retiree health benefits.

This news is just the most recent development in a long list of postal woes. The USPS estimates that it is losing $25 million a day, and the agency faces another $5.6 billion payment in September that it also lacks the ability to pay. Moreover, having lost nearly $25 billion in the last five fiscal years, the Postal Serviceis looking at widespread service cuts; it would like to close up to 3,700 post offices and 220 mail-processing plants by 2015.

The default, should it occur, will not immediately affect services — trucks will still be on the roads, payroll will be met, and current retirees will get their checks. Instead, the default will affect the USPS’s fund for future retirees, an obligation established in the 2006 Postal Accountability and Enhancement Act. Up until then, the Postal Service simply paid retiree health benefits when they came due. The new law required the agency instead to account for 75 years’ worth of retiree benefits on its balance sheet and to begin to pay down its unfunded liabilities. It gave the USPS a ten-year period to transition to the new system.

The rationale behind this provision was that a pay-as-you-go plan for retiree benefits does not work with an industry in severe decline. At the rate at which the USPS has been losing money, Congress was concerned that when current workers retired, there would be no funding for their pensions and health benefits.

However, in practice, the obligation to continue providing universal postal service while setting aside billions for future benefits, coupled with a stark decline in revenues, has proven to be a disastrous combination for the USPS’s balance sheet. The deep-running fiscal problems have collided with the proposed solution, culminating in a default of payment.

But the default is just the tip of the iceberg, revealing the larger, fundamental problems that plague the USPS. “While this is not a short-term problem, it is a serious sign of trouble,” James Gattuso, a senior fellow at the Heritage Foundation, told National Review Online. “It is an obsolete business. That fact is undergirding the entire thing — the business is shrinking because people are not mailing things the way they used to.”

In particular, demand has been dwindling for first-class mail, which used to be one of the agency’s largest profit sources. And these falling revenues have been coupled with high operating costs — stemming from rising labor costs and an extensive, expensive distribution network — that have finally caught up with the Postal Service.

Read the full article at National Review Online.

Fix Contributor Harry Graver is a sophomore at Yale University.

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