USPS Financial Trouble: What Caused It?

With vote-by-mail in the spotlight before the upcoming election, word is getting out about USPS and all its financial trouble. Is the Postal Service going under? Will it be able to handle all the mail-in ballots? Why are they shutting down sorting machines and removing collection boxes so close to the election? These are only a few of the questions on peoples’ minds, and the answers seem all but unclear. No matter the conjecture, one thing is clear: the Postal Service is in serious financial jeopardy. Read on for a breakdown of the reasons behind the Postal Service’s current financial predicament…and how it can wrangle itself out of it.

Pre-Funding Legislation Enacted in 2006 is the Main Reason for the Postal Service’s Financial Trouble

The origin of the US Postal Service’s financial woes begins back in 2006. That year, Congress enacted a bill titled the Postal Enhancement and Accountability Act. Basically, USPS was doing so well at the time, raking in tons of cash from its mailing products. Consequently, Congress wanted to ensure its future employees were set up financially, which led to them passing this particular bill.

Once enacted, this legislation required USPS to make federally mandated payments every year in the billions. These payments would then theoretically pre-fund future employees’ health and retirement benefits up to 75 years in the future. In essence, USPS was beginning to fund pensions for employees that hadn’t even been born yet.

Eventually, the revenue USPS was generating wasn’t enough to cover these federally mandated pre-funding payments. If USPS continued to make these payments, it would run the risk of insolvency. In layman’s terms, it wouldn’t have enough cash to continue operating and delivering mail and packages to the American people. So, in order to stay operational, USPS began defaulting (or skipping) these payments to the Treasury. However, the more USPS skipped its pre-funding payments, the more debt the organization racked up. At the end of 2019, USPS had an estimated $160 billion in debt—and $119.3 billion of it came from pre-funding payments they defaulted on.

Technology Contributed to Lower Mail Volumes, but Birthed the eCommerce Industry

Ironically, USPS makes most of its money from its two mail products: First-Class Mail and Marketing Mail. This is because a letter carrier is able to transport thousands of letters in a single shift, due to their lightweight and thin nature. At 55 cents each for First Class Mail and 20 cents each for Marketing Mail, it becomes a numbers game. On average, a single letter carrier delivers somewhere near 1,600 letters per day. For easy math, 1600 First-Class mail pieces brings in roughly $880 of daily revenue per letter carrier. The more letters a worker delivers, the more money USPS pockets…

…and therein lies the problem. In 2007, USPS began paying billions of dollars to the Treasury to fund its pension plans, based on the pre-funding legislation Congress enacted a year prior. Months later, enter the iPhone. When smartphones flooded the market in 2007 and became utterly ubiquitous, the demand for sending letters and postcards plummeted. The era of smartphones and widespread Internet adoption allowed for instantaneous connectivity. Although this cultural paradigm shift killed demand for mail pieces, it also helped birth the eCommerce industry. Subsequently, demand for USPS package services increased every year, and surged during the Coronavirus pandemic.

Revenue from Packages Never Quite Offset Losses from Dwindling Mail Volume

Through the years as package volumes rose, demand for mail services continued its decline. Eventually, businesses shuttered across the country due to COVID-19. The closing of businesses contributed to a decrease in Marketing Mail pieces that these organizations would typically send out. Simultaneously, new technologies like Zoom and Cisco WebEx became household names. With these newfound ways of connecting, the age-old practice of sending a letter grew even more into a thing of the past.

Ultimately, the increased demand for package services never became enough to offset the losses from dwindling mail volumes. eCommerce has been a lifeline for USPS over the past decade, but growing revenues from package services didn’t give the Postal Service enough rope to pull itself out of the financial hole that pre-funding legislation put it in.

Steering USPS Back to Financial Stability Isn’t as Simple as Raising Prices

Unfortunately, placing the Postal Service back on the road to profitability isn’t as a simple as raising the prices of its package products, such as Priority Mail and First Class Package Service. This has been the outlook of many right-leaning politicians—most notably President Trump, who created a Postal Task Force to diagnose the root of the USPS financial trouble shortly after he first took office. However, raising package price while keeping mail prices the same would hurt the millions of small businesses that rely on the Postal Service’s affordable rates and quick delivery times.

On top of hurting businesses, this would also negatively impact individuals in rural areas. If prices of package services increase, then individuals in far-to-reach would be forced to pay outlandish rates to receive the same level of service as individuals in more populated locations. As a result, the universal service that USPS has provided since its inception in 1775 would effectively no longer exist. For example, a diabetic in rural Wisconsin may end up paying double or triple what a diabetic in Los Angeles would for delivery of insulin…which is neither fair, nor morally right.

What Makes the Postal Service: Profits or Service?

At the end of the day, USPS doesn’t operate like any business out there. In fact, there are many who believe that because of its Universal Service Obligation, USPS shouldn’t be run like a business at all. According to this argument, USPS should operate like a non-profit. That way, the organization would focus less on making money than providing affordable, accessible service for every American.

No matter one’s outlook on how USPS should be run, one thing is abundantly clear: the first step to ensuring the Postal Service’s future is repealing the pre-funding legislation that got it into the biggest financial pickle the organization has faced in its 245-year history.