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Nov
26
2018
Report Number:
FT-AR-19-003
Report Type:
Audit Reports
Category: Finance

Treasury Inflation-Protected Securities

Objective

The Postal Service participates in three retirement plans: The Civil Service Retirement System (CSRS), the Federal Employees Retirement System (FERS), and the Postal Service Retiree Health Benefits (RHB). The first two are pension plans, and the third is set up to fund RHB premiums.

The Office of Personnel Management (OPM) administers these programs, including measurement of liabilities and, in conjunction with the U.S. Department of the Treasury (Treasury), management of retirement investments. These plans are restricted to government trust funds invested solely in fixed-rate U.S. Treasury securities, which are often regarded as riskless in the sense that there is virtually no possibility of loss of principal. However, the trade-off for this safety is a low rate of return that has a high probability of not generating adequate investment income to meet all the future obligations of the funds, especially if inflation increases.

Returns on Postal Service retirement investments have declined in recent years. More importantly, Postal Service retirement investments offer only limited protection against higher inflation. 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.

Currently, the total funding level for all three funds is at 76 percent, and all three funds are underfunded to varying degrees. The CSRS and the FERS are about 87 percent funded, but the RHB Fund is only 44 percent funded.

Our objective was to determine the impact of investing Postal Service retirement fund assets in TIPS.

What the OIG Found

Through investments in TIPS, the Postal Service could effectively reduce the risk that inflation poses to Postal Service retirement liabilities. While current investments offer only limited protection against higher inflation, TIPS are contractually linked to inflation and would mitigate the effects of higher inflation on pension deficits. Additionally, investments in TIPS could increase the returns on the three funds. We estimate the 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.

The Secretary of the Treasury has authority under current law to allow the OPM to invest retirement assets in TIPS, provided the Secretary determines that such investments would be in the public interest. While unprecedented for the Postal Service, such a determination is supported by the Military Retirement Fund’s $564.4 billion of TIPS purchased directly from Treasury. In addition, the military’s Medicare-Eligible Retiree Health Care Fund held $230 billion, or 79 percent of its assets, in TIPS at the end of June 2018.

What the OIG Recommended

We recommended management:

  • Determine a strategy regarding the allocation of the Postal Service CSRS, FERS, and RHB fund investments in TIPS.
  • Request approval from the Secretary of Treasury and the OPM to redeem fixed-rate Treasury securities in the Postal Service’s retirement funds and invest proceeds and other fund inflows in TIPS Securities. 

Report Recommendations

# Recommendation Status Value Initial Management Response USPS Proposed Resolution OIG Response Final Resolution
1

Determine a strategy regarding the allocation of the U.S. Postal Service Civil Service Retirement System, Federal Employees Retirement System and Retiree Health Benefits Fund investments in Treasury Inflation-Protected Securities.

Closed $0 Agree
2

Request approval from the Secretary of Treasury and the U.S. Office of Personnel Management (OPM) to redeem fixed-rate Treasury securities in the U.S. Postal Service retirement funds and invest proceeds and other fund inflows in Treasury Inflation-Protected Securities.

Closed $2,781,473,463 Agree