You don’t concentrate on risks, you concentrate on rewards, said aviation hero Chuck Yeager, who knew a thing or two about risks.
The government, on the other hand, is not inherently risk-oriented. You see this especially when it comes to investing employees’ retirement funds. We explored this issue in a whitepaper last year.
Our more recent audit report also suggests it might be time to rethink risk when it comes to the management of the U.S. Postal Service’s retirement investments.
The Office of Personnel Management (OPM) administers the Postal Service’s three retirement plans: The Civil Service Retirement System, the Federal Employees Retirement System, and the Postal Service Retiree Health Benefits (RHB). The first two are pension plans, and the third is set up to fund RHB premiums. OPM, along with the U.S. Department of Treasury, also manages the plans’ investments.
Investments are restricted to government trust funds invested solely in fixed-rate U.S. Treasury securities, often regarded as riskless because loss of principal rarely, if ever, happens. However, the trade-off is a low rate of return that may not generate enough income to meet future obligations, especially if inflation increases.
Unlike fixed-rate Treasury securities, however, Treasury Inflation-Protected Securities (TIPS) investments increase in step with inflation, thereby countering the effects of higher inflation on underfunded liabilities. We looked at the impact of investing USPS retirement fund assets in TIPS and found it could reduce the risk inflation poses and increase returns on the three funds. We estimated Postal Service retirement funds could earn about $1.4 billion annually over the next two years by exchanging a portion of its fixed-rate retirement assets for TIPS.
Other funds, such as the Military Retirement Fund, have purchased TIPS directly from Treasury.