Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why the US Postal Service Loses Money on Every Package
Transcript
- Lucas: So the United States Postal Service has now lost money fifteen years in a row, and the most recent fiscal year shows a loss of nearly ten billion dollars. But here's the number that really stopped me: on average, the Postal Service loses about two dollars for every package it delivers. Luna: Two dollars per package? That seems almost impossible for a delivery service. How do you stay in business losing money on every single item you ship? Lucas: Well, that's exactly the question we're going to dig into today. And before we go further, I want to mention that this show is supported by listeners like you. If you've ever had a moment where something about government spending finally clicked, and you want to help keep these conversations going ad-free, you can support us at buy me a coffee dot com slash fexingo. Every little bit helps us keep digging into these numbers. Luna: Yeah, and we really do appreciate that. It keeps the lights on and the research budget going. But let's get back to those two-dollar packages. Lucas: Right. So the immediate cause of the two-dollar loss is pretty straightforward: the Postal Service's costs are higher than its revenue. But the interesting part is why those costs are so stubbornly high, and that goes back to two things: a 2006 law that forced it to pre-fund retiree health benefits, and its universal service obligation. Luna: Let's start with the 2006 law, because I remember hearing about that but I never really understood it. What did it actually do? Lucas: So in 2006, Congress passed the Postal Accountability and Enhancement Act. And one of its provisions required the Postal Service to pre-fund health benefits for its future retirees for the next seventy-five years. No other government agency, and no private company, has to do that. It's an enormous financial burden that essentially forces the Postal Service to set aside billions of dollars every year for retirees who haven't even been hired yet. Luna: So it's like being asked to pay for your employees' medical care decades in advance, all at once. That's a massive cash flow requirement. Lucas: Exactly. And that pre-funding mandate is a big reason why the Postal Service has reported losses every year since 2007. Now, there's been some relief in recent years, with the Postal Service Reform Act of 2022, which eliminated the pre-funding requirement going forward. But the legacy debt from all those years of pre-funding is still on the books. Luna: So that's the first piece. What about the universal service obligation? That sounds like a noble goal, but it must be expensive. Lucas: It is expensive. The Postal Service is required by law to deliver mail to every address in the United States, six days a week, at the same price, regardless of location. That means delivering a letter to a remote cabin in Alaska costs far more than the stamp price, but the price is the same. Private carriers like FedEx and UPS can cherry-pick the profitable routes and charge more for rural deliveries. The Postal Service can't. Luna: So it's a public service that's supposed to lose money on rural routes, but then it's also expected to break even overall. That seems like a contradiction. Lucas: It is, and that's the core tension. Congress wants the Postal Service to operate like a business, but it also imposes these social obligations that make it impossible to be profitable. The result is a hybrid creature that's neither fully public nor fully private. Luna: And then on top of that, you have competition from private carriers on the profitable routes, right? So the Postal Service loses the high-margin business to FedEx and UPS, and it's left with the low-margin, high-cost deliveries. Lucas: Exactly. And that's why the package business, which you'd think would be a growth area, is actually the source of those two-dollar losses. The Postal Service has been trying to compete in package delivery, but its costs are higher per package than its competitors, because of its network obligations and its older infrastructure. Luna: Let's talk about that infrastructure. I've seen those delivery trucks that are ancient. How old are they? Lucas: The average age of the Postal Service's delivery fleet is over twenty-five years old. Some of those Grumman LLVs, the long-life vehicles, are from the 1980s. They're inefficient, they break down, and they cost a fortune to maintain. The Postal Service has been trying to replace them, but the process is slow and expensive. Luna: So the Postal Service is stuck in a cycle: it can't invest in modernizing because it's losing money, and it's losing money partly because it hasn't modernized. That's a trap. Lucas: That's exactly what the Postmaster General, Louis DeJoy, has been saying. He came in with a ten-year plan called 'Delivering for America,' which aims to modernize the network, invest in new vehicles and sorting equipment, and cut costs by consolidating processing facilities. Luna: But hasn't that plan also slowed down mail delivery times? I've heard complaints about letters taking longer to arrive. Lucas: Right, that's a trade-off. The plan explicitly accepts slower service standards for first-class mail in order to save money. They've moved from a two-to-three-day standard to a three-to-five-day standard. That's controversial, because it affects the universal service obligation. The Postal Regulatory Commission has even said the plan might violate the law. Luna: So they're trying to save money by cutting service, but the law requires them to provide that service. That's a real bind. Lucas: It's a bind, yes. And the financial projections from the Postal Service's own watchdog, the Office of Inspector General, suggest that even with the Delivering for America plan, the Postal Service will continue to lose money for the foreseeable future. They project cumulative losses of over $100 billion over the next ten years. Luna: Over a hundred billion dollars in losses. So what's the endgame here? Keep raising stamp prices? Lucas: Stamp prices have gone up several times in recent years, and there's pressure to raise them more. But there's a limit to how much you can raise prices without losing volume. And the Postal Service is already losing mail volume every year, as people shift to digital communication. Luna: So it's a death spiral: volume goes down, costs per item go up, prices go up, volume goes down further. Lucas: That's the fear. But there are other options. Some people argue that the Postal Service should be allowed to offer new services, like banking or notary services, to diversify its revenue. Others say it should be fully privatized, like in some European countries. And still others argue that it should be explicitly treated as a public service, funded by taxpayers, rather than expected to break even. Luna: Which of those do you think is most realistic, Lucas? Lucas: Honestly, I think the most realistic path is a hybrid: keep the universal service obligation but make it an explicit subsidy, so the Postal Service is compensated for the public service it provides. Right now, it's asked to do that at a loss, and it's just bleeding. If Congress were to appropriate funds for rural delivery, for example, that would take a huge weight off the balance sheet. Luna: But Congress hasn't shown much appetite for that. They seem to prefer keeping the Postal Service at arm's length and blaming it for its problems. Lucas: Exactly. And that's the political economy of it. It's easier to criticize the Postal Service for inefficiency than to make the hard choice to fund a public service or to let it go private. So the losses continue. Luna: So what's the one thing you want our listeners to remember from this episode? Lucas: I think it's that the Postal Service's financial problems aren't just a story about inefficiency. They're the result of a structural mismatch: a law that forces it to pre-fund benefits, a mandate to serve everyone at the same price, and a competitive market that skims off the profitable business. Until that structural problem is addressed, the losses will continue, no matter how many stamps they sell. Luna: And that's a problem that affects all of us, even if we don't think about it. Every time we mail a package or vote by mail, we're relying on a system that's financially unsustainable. It's worth paying attention to. Lucas: Absolutely. And if you want to dive deeper into the numbers, we've linked to the latest Postal Service financial report and the OIG's analysis in the show notes. You can find those at our website, fexingo dot com slash fiscal policy. Luna: Thanks for joining us, and we'll see you next time.