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So where does the $6B loss come from? It turns out that the overwhelming chunk of USPS expenses are due to a 2006 Congressional mandate that forces the agency to prepay for 75 years of benefits.

So do all private sector businesses. You can't promise employees $X in future benefits without putting $X into a pension fund. This requirement is uncommon in government, which is why many municipalities have unfunded pension obligations, but it's completely reasonable. The scary fact is that we only require the USPS to do this.

You are also misrepresenting the 75 year time horizon. The USPS is required to make the following (wildly oversimplified) spreadsheet:

    year    #living employees   # earned costs/employee
    2014       1000000            50000
    2015        900000            51000
    etc
The pension fund needs to have SUM(column B x column C) dollars in it (again, wildly oversimplified - it's actually the Present Value of Future Benefits). The 75 year requirement means the spreadsheet must have 75 rows. This prevents the fund from cheating by cutting off the calculation early and failing to account for payments they promised to make. Changing 75 years to 100 years wouldn't change anything.

The number "earned costs/employee" is the fraction of the pension costs that have already vested. I.e., if the employee has earned a pension of $100/month so far, but will have earned a pension of $5000/month at retirement, their earned costs are $100/month, not $5000/month.

This is the same calculation that ERISA requires of all private sector companies.

(Certain grandfathered companies in the private sector are also allowed to escape ERISA, and this will be a problem if any of them go out of business.)




After reading through the entire thread, I can see where your misunderstanding arises.

You are referring only to the payment of vested pension benefits. In this regard, you are correct--ERISA generally requires companies to fully fund vested pension benefits. Pension plan payments for vested benefits are not "pre-funding payments" since the liability has already accrued. A "pre-funding payment" would be a payment for pension benefits for which the liability has not yet arisen, i.e., for unvested pension benefits.

That is what is significant about the USPS--it is required to pre-fund its pension liabilities for its current and past employees, including for those benefits that have not yet vested and which would, absent the specific Congressional mandate not be required to be funded under ERISA.

The USPS is not required to prefund pensions for employees it hasn't hired yet, but you're the only one on the thread arguing that.


Here is the law. What portion of the law requires them to pay for benefits which have not vested?

https://www.govtrack.us/congress/bills/109/hr6407/text

Your interpretation is certainly not "in accordance with generally accepted actuarial practices and principles" as the law demands.


Nope, not even close. GM for example has a lot of unfunded pension obligations. Which is one of the reasons for the auto bailout if the US auto industry failed a lot of pensioners would see a huge drop in there monthly pension checks.

Above and beyond that companies set aside money each year for each working employee which is supposed to cover the majority of there pension they don't need to set asside the full cost on day one like the USPS.


How is my post wrong? From my post: (Certain grandfathered companies in the private sector are also allowed to escape ERISA, and this will be a problem if any of them go out of business.)

You are simply incorrect that the USPS needs to pay for an employee's pension on day one. They contribute according to a vesting schedule, same as any private sector company not grandfathered.

It's only in their projections that they must include full costs. Unlike many other agencies, the USPS can't tell Congress that a program will cost $X over the next 10 years, where $X excludes the cost of employee pensions.


You are wrong because the USPS is required to fully pre-fund all of its pension obligations. It does not pre-fund based on a vesting schedule, it must prefund each obligation all at once. That is why the prefunding obligation is always brought up when discussing the USPS's finances--it is a unique requirement that is not shared by any other entity, public or private.

You are probably misunderstanding the pre-funding schedule. Beginning in 2006, the USPS was obligated to make pre-funding payments with the goal of fully pre-funding 75 years worth of pensions by 2017. See the linked WaPo article, which explicitly states "Congress passed a statute in 2006 requiring the early payment of 75 years worth of retiree benefits within 10 years. " (This is not the same as vesting, because the pre-funding obligation is not tied to the vesting of any particular group of beneficiaries' benefits.)

More specifically, see section 801, et. al., for the specific language of the Postal Accountability and Enhancement Act fo 2006 which creates the silly requirement.


I don't care what some innumerate reporter at the WaPo wrote.

According to the actual law, what must be fully funded is the "actuarial present value of all future benefits payable from the Fund." What this means is that if an employee's pension has 50% vested, their "future benefits payable from the Fund" are 50% of their pension. The USPS is then obligated to put 50% of the NPV of their pension into the fund by 2017.

https://www.govtrack.us/congress/bills/109/hr6407/text

It's explicitly stated 5 times it should comport with "generally accepted actuarial practices and principles", which rules out all the insanity people seem to be attributing to this law.


Yes, I know what the text of the bill states, which is why I referenced it in earlier comments. More importantly, you yourself have posted the relevant language. The "acturial present value" part of the quoted phrase is what must comport with generally accepted actuarial practices. The problem is that "all future benefits payable" is by its express language not limited to vested benefits. You need to read the entire code section, not just little snippets.


I'm very much enjoying this discussion and I hope you guys can find a definitive statement about what the bill entails. (I find the language you have both quoted from the bill to be too vague to my uncertified ear to make a decision.)

Is your claim that the postal service must pre-fund unvested benefits at the day the employee is hired? That is, is that how you think "future benefits payable" is being interpretted? Because what's definitely not true is that the postal service is being required to fund un-hired (or unborn) employees. See this article, which has quotes from the Congressional Research Service.

http://www.cnbc.com/id/45018432


Plans may be underfunded if fully funding the plan represents a major threat to the business. The net effect of which is plans can easily become significantly underfunded without being grandfathered in.

(c) Variance from minimum funding standards (1) Waiver in case of business hardship (A) In general If— (i) an employer is (or in the case of a multiemployer plan, 10 percent or more of the number of employers contributing to or under the plan are) unable to satisfy the minimum funding standard for a plan year without temporary substantial business hardship (substantial business hardship in the case of a multiemployer plan), and (ii) application of the standard would be adverse to the interests of plan participants in the aggregate, the Secretary of the Treasury may, subject to subparagraph (C), waive the requirements of subsection (a) for such year with respect to all or any portion of the minimum funding standard. The Secretary of the Treasury shall not waive the minimum funding standard with respect to a plan for more than 3 of any 15 (5 of any 15 in the case of a multiemployer plan) consecutive plan years.


>> Which is one of the reasons for the auto bailout if the US auto industry failed a lot of pensioners would see a huge drop in there monthly pension checks

Most of them already have.


It should be noted that post-ERISA, the preferred alternative to promising $X in future benefits without putting $X into a fund is to put in $X, but then get the money back on the backend when some private equity company takes the company through bankruptcy to reduce its pension liabilities. Private sector pension plans are overall in much better shape than public sector ones, but that's not saying all that much.


My memory from previously looking at this is that you're completely right. But if so, news coverage like that WaPo article are egregiously intellectually dishonest (even if they don't technically lie).

Is there a counter-argument to what you've written that smart people on the other side will offer even if it's not convincing? The only one I could imagine is "The federal government has a special economic status so it doesn't need to fund the future costs it commits to, a la social security". But that's pretty weak.


I don't know of a good argument against applying ERISA to the government. Nor do I know a good argument against fixing all the various ERISA loopholes (e.g., certain private sector post-retirement health care benefits are excluded from ERISA). But I'd also love to hear one.

As for the "egregiously intellectually dishonest" WaPo, I'd simply point out that most reporters are innumerate. Full stop. If you give them an explanation like what I just did, their eyes glaze over and they either parrot what I just said (if their intuition/opinions agree with it) or go find an opposing expert (if they dislike my conclusion). For other examples of this, go read financial crisis reporting - "an evil vampire squid just ate a black swan and then pooped toxic waste onto innocent homeowners."


The Problem isn't the prefunding, it's the suddenly being expected to prefund for half a million employees in 10 years. A private company accrues those costs one employee at a time over several decades.

There is the question of whether, in 2017 once this has been sorted out, what (if anything) they'll change to remain profitable with the increased employee costs going forward but they were quite profitable before this happened so I don't see too much of an issue.

Although the federal government DOES HAVE special economic status so I'm not sure how you think that's particularly weak unless you think reality is pretty weak.


The USPS was not actually profitable. They simply seemed profitable because they were hiding the cost of retirement benefits. Forcing them to prefund is nothing more than forcing them to acknowledge the debts they already accrued. If that tips them into the red, they were not profitable before. They were simply pretending to be profitable via accounting tricks.

$100 in revenue - $75 in costs - $50 in off balance sheet debt is not profitable.

The special economic status of the federal government simply means that the taxpayer is on the hook for the USPS's hidden debts. No one disputes this. What's under dispute is whether the USPS should be allowed to incur hidden debts on behalf of the federal government (PAYGO accounting), or whether their debt should be transparently included in the federal debt (ERISA accounting).


If anything, it's the change from not-funding to pre-funding. It's not new money that has to be conjured from thin air, it's money that is already owed.

USPS is NOT put in a worse situation than private companies. It had a privilege that put it in a much, much better situation revoked.

The fact that future governments can (probably) be relied on to make good on promises made today is a "weak argument" for just kicking the can down the road instead of funding the liability immediately.

In 2017, USPS's costs will go down, significantly, because they no longer have the backlog of pensions to fund, they will just to funding pensions on an ongoing bases. Exactly like private companies. At that time, USPS will be in a situation where it can be reformed, because it no longer carries around a glut of unfunded liabilities that will be dumped in the government's lap if something goes belly up.


The weakness comes not from the unreality of the special economic status, but from the improbability that that status actually changes whether it's a good idea.


"This is the same calculation that ERISA requires of all private sector companies."

Not quite. It should be "all private sector companies that offer pensions." That's only about 18% of private employers as of 2012. See http://www.bls.gov/opub/mlr/2012/12/art1full.pdf


Even private sector companies with defined contribution plans need to do this calculation. It's just trivially easy for them - the calculation amounts to "did the bank transfer into the 401k happen on schedule?"


Good point!


No organization fully funds a pension 75 years out.


Google the definition of "fully funded". Any organization complying with ERISA is funding a pension not only for 75 years, but for 75 billion years.


Only defined contribution pension plans are required to be fully funded...because of the nature of the pension (the plan guarantees the amount input but not the benefits available when the worker retires). A defined benefit plan can be fully funded, but ERISA does not require this--indeed, few defined-benefit pension plans, public or private, are fully funded. Moreover, fully funded in this context only refers to the funding of vested benefits. The USPS is required to pre-fund all benefits for current and past employees, even those benefits which have not yet vested.

Also, please note that in other posts you are conflating 401-k contributions with pension contributions. They are not even remotely the same thing.


I'll just pretend I don't know about the dozens of times pensions were withdrawn by big corporations because they can. Just Google "pensions gone" or similar queries, if you're really that clueless.




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