Historical Analysis of USPS Retirement Fund Returns

Transcript for: Historical Analysis of USPS Retirement Fund Returns Podcast

Hi there, everyone. This is Tristan Dreisbach with the U.S. Postal Service Office of Inspector General. I'm here today with my colleague, Joyce Anzalone. We're going to talk about a recent OIG research paper looking at the Postal Service's retirement fund returns.

Joy, I'm really excited for a conversation. So please tell us about your research.

Great. Thank you so much, Tristan, for having me. So, the paper that the OIG just published is a historical look at the Postal Service's investment strategy of its retirement funds and comparing their actual strategy to an alternative strategy that includes stocks and bonds. It's a follow up paper to a paper the OIG published in 2017, which was forward looking.

That paper looked at how and what the Postal Service's finances will look like in 20 years, if they invested the funds today. Before I dig into what we found with this paper, a little bit of quick background. The Postal Service and its employees participate in three retirement programs.

First is the Civil Service Retirement System, or CSRs. The second is the federal employees Retirement System, or FERS. And those two funds are for the entire civilian federal government. They're not unique to the postal service.

The third, however, is unique to the Postal Service, the retiree health benefits fund. And that fund funds health premiums for Postal Service retirees. The challenge, and one of the reasons that we did this paper, was that all three funds are underfunded, which means that there's not enough money in the plans to pay for future retiree benefits.

And the unfunded liability is growing. In fact, the health benefits fund is actually projected to run out of money entirely in 2032.

Yikes. Joy, so running out of money, that sounds a little alarming, but it's not too late to do something, right?

Right. So, one option that is available is to invest the retirement assets. Currently, the Postal Service's assets are invested entirely in Treasury bonds. And Treasury bonds are very safe investments, but they don't earn very much investment income, especially compared to a portfolio that might have a mix of stocks or bonds.

Importantly, the Postal Service doesn't actually have any control over how the money is invested. The Office of Personnel Management and the U.S. Treasury control the funds, and in fact, the investment strategy is dictated by law. So, it would take an act of Congress to invest outside of Treasury bonds.

One thing, though, that the OIG has looked to previously is investing in Treasury inflation-protected securities, also known as TIPS. And they hedge against inflation, and investing in tips would actually not involve congressional involvement. The Postal Service could theoretically do that today. Investing differently could increase investment income for the Postal Service and improve plan funding for all three of the Postal Service's retirement plans.

That's interesting. So, Joy, how does the Postal Service's current investment strategy differ from how other pension funds invest their assets?

Great question. Our research looked into the investment strategies of state, local, and private pension systems and found that diversification is really the norm in those plans and diversification.

We looked in all of those plans, but we included a mix of stocks, bonds, and other assets like real estate. Importantly, historically, those plans have had a higher rate of return on their investments than what the Postal Service has earned on its investments.

Also, we found a few federal examples of fund diversification. For example, the Department of Defense's military retirement fund actually invests in TIPS, Like I mentioned earlier.

Got it. Now, Joy, I understand that your research looked into what the Postal Service's retirement bonds would look like today if they had invested that money differently in the past.

Right. So, with our analysis, we looked back as much as 50 years to see how investing in a portfolio of 60 percent stocks and 40 percent bonds would have changed the Postal Service's financial picture today.

So, at the end of fiscal year 2022, OPM estimated that the Postal Service had about $300 billion in its retirement funds, and that's between the three plans that I mentioned earlier. Our analysis showed that with a 60 percent stock, 40 percent bond investment, that $300 billion could have been $1.2 trillion or four times greater than what they actually have. In our full whitepaper, we break down that $1.2 trillion between the three plans. So, you can see the growth and compounding over time.

And our whitepaper is available at www.uspsoig.gov.

While over $1,000,000,000,000. That's a huge difference from the actual balance that the Postal Service has today.

So, Joy, what did your research find about the impact of diversification on the three different retirement programs?

Well, we found that all three funds would have had a higher balance today had the Postal Service been able to invest those funds. And it impacted all three of them somewhat differently. The main driver of the higher fund balance was CCRC. And with CSRS, we looked back to 1971. So more than 50 years to when the Post Office department became the U.S. Postal Service that we know today. And over those 50 years, the money had a lot of time to grow and compound with FERS.

We found that the balance today would have been $100 billion larger than it would have been under the current scenario. And with the health benefits fund, we found that the balance today would have been $38 billion larger. What's important to note is that greater returns mean that the Postal Service has to spend less on its retirement obligations, and in turn that frees up money for the Postal Service to spend elsewhere, such as on its processing or delivery networks or expanding its workforce.

So, Joy, what might this research mean for the Postal Service going forward?

Well, one thing that's important to point out is that just because our analysis found that they could have had a lot more money today had they diversified their investments in the past, but doesn't necessarily predict the future. It's also important to recognize all three funds are different and at different stages and different investment strategies might be more appropriate for each of the three funds.

For example, CSRS is a closed fund, which means there are no new participants and it can't recover as easily from a market downturn because of that. On the other hand, FERS has many active participants and new participants coming on every day and might be more appropriate for diversifying its investments.

See, that's really interesting. Joy, could you tell us about any other work that the OIG has done on investing the Postal Service's retirement funds?

Sure. So again, with this paper that we just did, we looked at the past a historical look. In 2017, we did a forward-looking paper that had a similar conclusion that diversifying investment would help the Postal Service have more money in its retirement funds.

Another paper, the OIG published in the recent past, looked at foreign posts and how they invest their retirement funds. And similar to our findings of state, local, and private pension systems, our analysis found that foreign post diversification is the norm for those plans as well.

That's great historical perspective, Joy. So, if someone wants to learn more about our work, where can our listeners go?

Sure. Our current paper and all of the papers I mentioned are available on the uspsoig.gov website.

And there you can find this white paper and all of our other work. Well, thanks, Joy. Our time, unfortunately is coming to an end, but this has been a great conversation. Thanks to all our listeners for joining us today. Yes, thank you so much, Tristen.