USPS OIG Report: Using U.S. Postal Service-Specific Assumptions for Calculating the Retiree Health Care Liability
This report presents the results of our self-initiated review of Using U.S. Postal Service-Specific Assumptions for Calculating the Retiree Health Care Liability (Project Number 13BG015FT002). Our objective was to review the assumptions used for the Postal Service’s retiree health care liability calculation and determine what effect those assumptions may have on the retiree health care liability calculation estimate. See Appendix A for additional information about this review.
The Federal Employees Health Benefits (FEHB) program offers health insurance to employees and retirees of the Postal Service and federal agencies. The Postal Service, employees, and retirees contribute to the FEHB program for future benefits. The U.S. Office of Personnel Management (OPM) administers the FEHB program and reported that, as of September 30, 2012, the Postal Service had an unfunded liability of $47.84 billion for its retiree health care benefits. (Using Postal Service-specific actuarial assumptions, the unfunded liability would be $50.18 billion, resulting in a $2.34 billion increase in the unfunded liability) The U.S. Postal Service Office of Inspector General (OIG) previously analyzed funding levels and provided comparisons to the federal government, military, state governments, and corporations. Those comparisons supported the Postal Service’s funding of its retiree health care liability at 49 percent.
This report focuses on the calculation behind the retiree health care liability. Specifically, we wanted to identify whether there were characteristics of Postal Service employees that distinguish them from other federal employees to the extent that those characteristics impact the retiree health care liability. To assist in answering our objective, the OIG contracted with Hay Group, an independent actuarial firm with expertise in Postal Service retiree health care benefits.
Demographic differences between Postal Service and other federal employees impacted the calculation of the retiree health care liability estimate. Specifically, Postal Service employees have distinguishing employee characteristics (termination, retirement, disability, death, life expectancy, and health care plan elections) that the OPM does not take into consideration when applying actuarial assumptions. When calculating the retiree health care liability using actuarial assumptions specific to the Postal Service, the liability is increased by $2.34 billion. Using assumptions that more closely align with Postal Service employees causes the retiree health care liability to increase from $93.58 billion to $95.92 billion.
We believe the Postal Service’s retiree health care liability should be calculated using actuarial assumptions specific to Postal Service employees. This approach provides a more accurate estimate of retirement liabilities that are more likely to match future retirement benefits actually paid.
Characteristic and demographic differences between Postal Service employees and other federal employees impact the projected retiree health care liability. Specifically:
The demographic characteristics and career patterns of Postal Service employees are different from those of federal employees. Postal Service employees are less likely to leave their positions and withdraw from the health care system, less likely to take early retirement, yet more likely to die while employed or retire on disability. The overall effect increases the retiree health care liability.
The OPM projected improved mortality rates for federal employees. However, when considering only Postal Service employees, the mortality improvements for retired men ages 55 to 64 were significantly lower at 0.3 percent compared to the OPM’s projected 1.7 percent. Overall, the mortality improvement for retired men was 1 percent for Postal Service employees compared to the OPM’s 2 percent projection. For retired females, the mortality improvement was slightly higher at 1.5 percent for Postal Service employees compared to the OPM’s 1.2 percent projection. The combined effect of these differences reduces the retiree health care liability.
Postal Service employees have a higher enrollment in family health care plans versus federal employees, prompting an increase in the retiree health care liability.
As of September 30, 2012, the OPM projected a $47.84 billion unfunded liability for the Postal Service’s retiree health care benefits. Using Postal Service-specific actuarial assumptions, the unfunded liability would be $50.18 billion, resulting in a $2.34 billion increase in the unfunded liability