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NALC: OPM valuation of the USPS FERS pension fund surplus is wrong

Nov. 15, 2012 — OPM’s decision is misleading on two counts. The current near-record low interest rates produce a misleading figure that is likely to change; beyond that, OPM’s use of generic assumptions on wages and mortality (as opposed to ones applicable to postal employees) badly skews the results. Simply using accurate data going in would produce a surplus figure of more than $15 billion.

The OPM decision to reduce the discount rate used in its 2011 valuation of the postal FERS account in the Civil Service Retirement and Disability Fund is not surprising. Interest rates have been declining and are near record lows. When interest rates rise as the economy strengthens, the discount rate will increase again and the postal surplus will once again rise sharply.

It should be noted, however, that the OPM’s method for valuing the postal FERS account fails to use USPS-specific assumptions on postal wages and postal employee mortality. It therefore fundamentally underestimates the postal surplus in FERS. This was the finding of a recent report from USPS Office of Inspector General titled Causes of the Postal Service FERS Surplus (Report Number: RARC-WP-13-001, October 12, 2012) prepared by The Hay Group. It estimated the 2010 postal surplus at $24 billion, far greater than the $10.9 billion surplus reported. That 2010 estimate used a higher discount rate (5.75 percent) than the 2011 estimate (5.25 percent).

The OPM continues to underestimate the postal FERS surplus because it uses a single set of economic and demographic assumptions based on all federal employees to value the postal FERS account.  However, the Postal Service’s workforce is different than the rest of the federal workforce. Its employees are a distinct group with markedly different demographic and mortality characteristics. Historically, salary increases over a career in the Postal Service have lagged those experienced by other career federal employees. Postal employees tend to remain in blue collar jobs their entire careers and do not receive regular promotions that increase their pensionable pay; they typically reach their maximum pay after 12 years. By contrast, white collar federal employees tend to begin in the lower grades of the various federal pay systems and move up the pay scales throughout their careers.  In addition, average life expectancy among mainly blue collar postal employees is less than it is for mainly white collar federal employees. A fair valuation of the postal sub-accounts requires the use of USPS-specific assumptions.

According to NALC’s actuarial experts, the 2011 surplus would be $15-$16 billion using the lower discount rate and economic/mortality assumptions based on postal employees’ actual demographics and wage history. In other words, if calculated properly, the actual surplus would be significantly larger than previously thought, even with a lower discount rate.  NALC has called on the OPM to adopt the more accurate method recommended by the OIG report.